Chronicle Journal: Finance

Nike vs. Adidas: Which Stock is a Better Buy?

With sporting events resuming and outdoor exercise participation increasing, the sportswear industry is witnessing a strong recovery so far this year. In fact, increasing health consciousness among individuals and a rising consumer preference for athleisure are expected to be a catalyst for the industry’s growth. This should position Nike (NKE) and Adidas (ADDYY) for exceptional growth in the coming months. But let’s find out which of these stocks is a better buy now.

The world’s leading sports brands Nike, Inc. (NKE) and Adidas AG (ADDYY) have driven growth in the sportswear market and increased their brand values significantly over the past several years. NIKE sells its products in six categories—running, NIKE basketball, the Jordan brand, football, training, and sportswear. ADDYY sells footwear, apparel, accessories and gear, equipment, and golf products under the Adidas and Reebok brand names.

The rebound in outdoor individual sports activities and team sports has accelerated the demand for sportswear and athletic gear this year. In fact, an increased focus on activities such as home workouts, running, yoga, and Pilates have motivated consumers to buy more sports and wellness-related products. Increasing health awareness and the growing popularity of athleisure should bolster the demand for products offered by sporting giants NKE and ADDYY. Given their continued innovation and seamless marketplace operations, we believe both companies have plenty of room to grow.

Over the past year, NKE has gained 55.6%, while ADDYY has returned 49.8%. In terms of past their three-month’s performance, ADDYY is the clear winner with 0.8% gains versus NKE’s negative returns. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

In March, NKE named Sarah Mensah as the VP/GM of the North America segment and Amy Montagne as the VP/GM of APLA segment. Their breadth of experience and leadership skills should enable them to continue driving momentum in the company’s consumer direct acceleration and  brand and business growth.

In February, the company acquired Datalogue, a leading data integration platform, to focus on its consumer-led digital transformation. This should allow NKE to accelerate how it connects with customers to provide them with better services at scale.

On March 10, ADDYY introduced its new strategy, ‘Own the Game’, to boost brand credibility, to focus on creating a unique consumer experience and to expand its activities around sustainability. This growth strategy should allow the company to gain significant market share and to  increase its sales and profitability through  2025.

Recent Financial Results

In the fiscal third quarter, ended February 28,  NKE’s revenues increased 3% year-over-year to $10.4 billion, driven primarily  by Greater China’s 51% revenue growth. But its revenue under its  North America segment declined 10.4% from the year-ago value to $3.56 billion. The company’s gross profit rose 5% from the prior-year quarter to $4.72 billion, while its net income increased 71% year-over-year to $1.45 billion. Its EPS increased 70% from its  year-ago value to $0.90. However, its revenues for the NIKE brand were $9.8 billion, representing a 2% decrease from the prior-year quarter on a currency-neutral basis, due primarily to declines in its wholesale business.

ADDYY reported €5.27 billion ($6.40 billion) in net sales, representing an increase of 20.2% year-over-year, in the first quarter, ended March 31, 2021. Its gross profit rose 25.4% year-over-year to €2.73 billion ($3.32 billion). Furthermore, the company’s operating profit increased 1,362.6% from its  year-ago value to €704 million ($855.6 million). Its net income came in at €558 million ($678.2 million), representing a 1,719.7% increase from the prior-year quarter. ADDYY’s EPS from continuing and discontinued operations rose 1,723.8% year-over-year.

Past and Expected Financial Performance

NKE’s revenue has increased at a 3.8% CAGR over the past five years. In comparison, ADDYY’s revenue grew at a 3.6%  annualized rate over this period. And the CAGR of NKE’s tangible book value has been 6.9% over the past three years. In comparison, ADDYY’s tangible book value grew at a 11.6% CAGR over the same period.

NKE’s revenue is expected to increase 15.8% in the current year and 12.4% next year. The consensus EPS estimate indicates a 95.6% increase in the current year. In contrast, analysts expect ADDYY’s revenue to increase 8.4% in 2021 and 9% in 2022. Also, the company’s EPS is estimated to increase 614.1% in the current year.

Profitability      

NKE’s trailing-12-month revenue is 1.6 times ADDYY’s. But ADDYY is more profitable, with a 50.2% gross profit margin versus NKE’s 43.4%.

However, NKE’s 10.7% levered free cash flow margin compares favorably with ADDYY’s 6.6%.

Valuation

In terms of trailing-12-month Price/Sales, NKE is currently trading at 5.61x, 148.2% higher than ADDYY, which is currently trading at 2.26x. Also, its 31.06x forward EV/EBITDA  is 88.5% higher than ADDYY’s 16.48x.

NKE is also more expensive both in terms of trailing-12-month Price/Book (18.25x versus 6.41x) and trailing-12-month Price/Cash flow (46.89x versus 30.15x).

POWR Ratings

ADDYY has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, NKE has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

In terms of Stability Grade, ADDYY has a B, indicating that it is more stable than its peers. In contrast, NKE has a Stability grade of C.

Both NKE and ADDYY have B grades in terms of Growth, which is consistent with their earnings and revenue growth.

In terms of Momentum , both NKE and ADDYY have a B, which is consistent with its price returns over the past year.

Of the 34 stocks in the A-rated Athletics & Recreation industry, NKE is ranked #23 while ADDYY is ranked #21.

In addition to what we’ve highlighted, our POWR Ratings system has also rated both NKE and ADDYY for Quality, Sentiment and Value. Get all NKE ratings here. Also, click here to see the additional POWR Ratings for ADDYY.

The Winner

While  NKE and ADDYY are good long-term investments, considering their market dominance and solid brand momentum, ADDYY appears to be a better buy based on the factors discussed here. Even though NKE has witnessed strong digital sales growth, ADDYY’s top-line expansion in all market segments, new growth strategy, and relative undervaluation make it a better investment option.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the top-rated stocks in the Athletics & Recreation industry.


NKE shares were trading at $136.12 per share on Tuesday morning, down $0.28 (-0.21%). Year-to-date, NKE has declined -3.59%, versus a 10.34% rise in the benchmark S&P 500 index during the same period.



About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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