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Brands
European Sporting Goods:
Golden Boots
We initiate coverage of the Sporting Goods brands
Adidas and Puma – both Overweight. We believe
these companies are in a strong position to outperform
peers. They are relatively early cycle given accessible
price points and broad consumer appeal; we feel that
sporting goods present one of the most exciting
exposures to the high-growth Chinese consumer market.
Valuation is compelling: Adidas and Puma trade on an
average 13.1x P/E in 2010e, dropping 10.9x in 2011e.
On a PEG basis, Adidas trades on just 0.8x and Puma
1.0x – a compelling entry point, in our opinion.
China is the most important growth market for the
international sports brands, in our view. Chinese
consumption of sportswear is in a growth sweet spot.
Demand for these products is driven by fashion as well
as sports participation, and the brands are benefiting
from appetite for premium Western brands.
We believe Adidas and Puma are in a strong
position to gain market share. Our proprietary
research on mainland Chinese consumption patterns
reveals fashion is more important than the performance
category. This is favourable for both Adidas and Puma.
Both Puma and Adidas are highly cash-generative.
On our forecasts, they will generate cumulative free
cash flow over the next three years equivalent to c.20%
of their market capitalisation. We assume Puma
resumes its share buyback activity in 2010 and that
Adidas uses cash to deleverage (we expect its gearing
to drop from 2.5x in 2009 to 1.1x in 2011).
Valuation highly attractive – 32% potential upside at
Adidas, 17% at Puma. Looking beyond 2009, which is
depressed by a weak trading environment and
restructuring activities, Adidas trades on an adjusted
P/E of 13.0x in 2010e, 10.5x 2011e; similarly, Puma
trades on 13.3x in 2010e, dropping to 11.4x in 2011e.
This compares favourably with the brands’ average of
18x in 2009e and 2010e. Adidas and Puma offer the
fastest earnings growth within brands, in our view.
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