Professional Documents
Culture Documents
InvestInU AG – Comparison of
Nike and Adidas for a possible
investment”
© 2010
Page 1
Contents Page
Chapter 2 Introduction 4
Chapter 7 Recommendation 12
Appendices 13
Bibliography 19
Illustrations & Tables 20
Abbreviations 20
© 2010
Page 2
Chapter 1 – Executive Summary
The following report is based on an investment scenario, where a team of analysts
has to evaluate two possible investments each of 10m€ against each other. As pre-
defined by their fond manager they can only compare Nike with Adidas. Other
relevant conditions are mentioned in the introduction.
The report divides into 3 main parts. It starts with an analysis of the track record of
both companies, comparing growth of share price and total dividends paid from 2006
to 2009. Out of this first round Nike seems to be the most appropriate choice.
In the second part the same analysis is performed based on the forecasts of both
companies, provided by analysts as well as companies’ management. Again Nike
looks more favorable then Adidas, even so Adidas shows evidence to close the
financial gap.
Both parts end up with a calculation of NPV and total CF to concentrate evaluation to
a single number comparison.
In the last part of this report, different kinds of risks have been investigated in order to
evaluate the reliability of the forecasts. This part splits into 3 subchapters; stock
performance, company performance and market performance.
Stock performance looks at certain key figures, which have major influence on share
price and dividends. Company performance investigates possible risks coming from
equity leverage and indicators that prove if the companies are able to finance their
planned growth on a stable base. Market performance takes a view on business
important indices in order to control targeted growth rate.
Like in the first two parts, Nike achieves the number one position and therefore is
strongly recommended by the analyst team.
© 2010
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Chapter 2 – Introduction
InvestInU is an investment company based in Germany. The company has recently
collected additional capital coming from EU investors to be invested in the sportswear
business. The total amount of money raised sums up to 10 m€ with a pre-defined
investment duration of 3 to 4 years and a weighted average cost of capital of 3%. All
investments are executed at the Frankfurt Stock Exchange (Xetra) and only in
ordinary shares. Due to this all share price calculations are made without currency
risk. For the dividends we assume a long-term currency exchange rate of 1.30 $ per
1€ (based on prognosis of Post Bank and Bayern LB). Risk factor is set with 2% and
equal for each possible investment. The fond manager has already identified two
companies for a possible investment: Nike and Adidas. A team of analysts has been
requested to evaluate which of these 2 companies would be the most appropriate
investment under the conditions mentioned before.
The analyst team agreed that it should concentrate on 2 main figures to answer this
question. They focussed on share price and dividends with further analysis if required
to substantiate their findings and add possible risks. Regarding risk management
stock performance as well as company performance and market performance have
been selected as main areas for additional investigation. The following report was to
be submitted to the fond manager by the 11th of July 2010.
© 2010
Page 4
Summarizing both companies possess solid positions in their main businesses with
regional advantages for Nike in the US and for Adidas in the international market. For
additional information please refer to Appendix 2 (market shares of Nike and Adidas).
The next chapter will evaluate what results the two competitors have been able to
generate out of there advanced position.
Management stated a main reason for the underperformance of Adidas in the last
annual report. They identified the “turbulence on the international stock markets
related to the crisis in the financial sector and fears the USA might slip into recession”
and “concerns about the Reebok business outlook” as two main drivers of the
downturn.
© 2010
Page 5
Another key impact can be extracted from the financial statement of 2009. The net
profit of Adidas reduced more then 60% in 2009. Nike was capable of stabilizing
results with a minor reduction of only 20% in 2009. For additional information please
refer to Appendix 3 (share prices of Nike and Adidas).
+18% CAGR
Dividends
[$/€]
1,0 0,98
-6% CAGR
0,9 0,88
0,8
0,71
0,7
0,59
0,6
0,50 0,50
0,5
0,42
0,4 0,35
0,3
0,2
0,1
0,0
2006 2007 2008 2009
Illustration 2: Comparison of dividend development
After reviewing the last years’ performance of both companies under the perspective
of a possible share investor, Nike seems to be the better choice based on growth in
shareholder value (share price and dividends paid). The following calculation of total
cash flow and net present value substantiates these findings.
© 2010
Page 6
Chapter 4.3 – Total return on investment calculation
A possible investor with the conditions given in the introduction at the beginning of
2006 would have received the following total return at the end of 2009, calculated by
the net present value of January, 1st 2006:
Company NPV CF
Nike 2.90 m€ 5.64 m€
Adidas -0.77 m€ 1.19 m€
Table 1: Comparison of NPV and CF track record
As expected, Nike would have been the preferred investment. For additional
information please refer to Appendix 4 (calculation of historical NPV and CF).
Nevertheless, results from share price development have also shown that Adidas
only fell behind Nike in the beginning of 2009 and makes progress since that time.
Therefore, the next chapter will concentrate on the more important forecast of both
companies.
© 2010
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Chapter 5.2 – Dividends prognosis
From 2010 to 2013 both companies are expected to improve their dividends per
share significantly. Adidas (CAGR +29%) seems to gain ground in the competition
with Nike (CAGR +12%).
In case of Nike these results look similar to the historical performance presented in
Chapter 3. As the prognosis is based on the estimation of EDPM Inc. it has been
corrected by the difference between their values and the forecast of Nike for 2010
(EDPM: 1.22$ vs. Nike: 1.08$).
Adidas in contrast might receive extraordinary results. Analysts from Berenberg Bank
justify these results with over proportional growth of net profit as an effect of an
improved gross margin. For additional information please refer to Appendix 5
(Berenberg and EPDM forecast figures).
+12% CAGR
Adidas (€)
Dividends
[$/€] Nike ($)
1,53
+29% CAGR
1,4 1,36
1,21
1,2
1,08
1,01
1,0
0,82
0,8
0,69
0,6
0,47
0,4
0,2
0,0
2010 2011 2012 2013
Illustration 3: Comparison of dividend forecast
© 2010
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Chapter 5.3 – Total return on investment calculation
A possible investor with the conditions given in the introduction investing in June
2010 could receive the following total return at the end of 2013, calculated by the net
present value of June, 1st 2010:
Company NPV CF
Nike 2.15 m€ 4.71 m€
Adidas 1.40 m€ 3.81 m€
Table 2: Comparison of NPV and CF forecast
Still Nike seems to be the preferred choice based on these figures, but Adidas has
gained a substantial step in closing the gap towards Nike. For additional information
please refer to Appendix 6 (calculation of forecasted NPV and CF).
Besides the possible gains, the next chapter will take a closer look at the risks and
uncertainties of this scenario.
© 2010
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A forecast from various analysts combined from the online stock portal Onvista
shows that companies are expected to generate a high level of free cash-flow during
the following years.
+6% CAGR
Adidas (€)
+24% CAGR Nike ($)
FCF
[€/$] 5,48 5,47
© 2010
Page 11
Footwear Index
Nike +5% CAGR
Adidas +6% CAGR
80
60
40
20
0
2009 2010 2011 2012 2013
Illustration 5: Comparison of sales growth forecast in global footwear market
Besides this index, the upcoming world cup in soccer is expected to further boost
sales of both companies. Especially Adidas, who is the leader in soccer shoes and
apparel, depends on this event. Comdirect Bank estimates the additional possible
revenues up to more then 1.3 b€. For additional information please refer to Appendix
9 (market performance).
Chapter 7 – Recommendation
Based on the historical results, the companies’ forecast and the risk evaluation, we
strongly recommend buying Nike shares rather then Adidas shares.
Nike promises a 54% higher net present value and a 34% higher cash-flow from a
possible investment. In their track record they have proven that they are capable of
delivering those results to their shareholders/investors. Additionally, Nike shows a
secure overall position in terms of stock performance, company performance and
market performance with even less risk compared to Adidas within the first two
categories mentioned before. Especially during the crisis, Nike has performed
obviously better then Adidas. Only in the short term (2010) Adidas might receive a
certain financial advantage due to the world soccer cup, but also Nike will profit from
this event.
© 2010
Page 12
Appendices
Appendix 1 – revenues of Nike and Adidas
16.326
14.955
15.000
5.000
0
2006 2007 2008 2009
Apparel
INTERNATIONAL (US$ m) 2005 2006 2007 2008 USA (US$ m) 2005 2006 2007 2008
Nike 8.9% 10.9% 11.0% + Nike 7.3% 7.5% 7.7% 8.1% +
adidas 10.5% 12.0% 12.7% + adidas 4.7% 5.0% 6.2% 5.4% 0
VF Corp 2.0% 2.1% 3.0% + VF Corp 4.5% 5.1% 6.0% 6.6% +
Quiksilver 2.4% 2.9% 3.1% 0 Quiksilver 2.5% 2.5% 2.5% 2.2% 0
Hanes / Champion 1.1% 1.0% 1.1% 0 Hanes / Champion 5.2% 3.9% 4.0% 4.3% -
PUMA 2.8% 3.5% 3.8% + PUMA 0.4% 0.5% 0.4% 0.5% 0
Columbia 1.1% 1.4% 1.4% 0 Columbia 2.2% 2.3% 2.2% 2.0% 0
Gildan 0.3% 0.3% 0.3% 0 Gildan 2.3% 2.5% 3.1% 4.0% +
Broder Bros. 0.0% 0.0% 0 Broder Bros. 3.9% 3.6% 3.4% 3.3% -
Billabong 1.1% 1.7% 1.4% + Billabong 1.3% 1.7% 1.6% 1.9% 0
TOTAL TOP 20 34.0% 45.9% 48.9% ++ TOTAL TOP 20 40.5% 40.2% 41.9% 43.1% +
© 2010
Page 13
Nike
Year First High Low Last
1992 7.20 9.06 5.47 8.63
1993 8.66 9.27 4.62 5.07
1994 5.17 7.65 5.17 7.31
1995 7.35 12.88 6.35 12.88
1996 12.82 24.67 11.71 24.54
1997 23.65 32.85 17.64 17.64
1998 18.28 24.24 13.80 17.38
1999 17.35 31.00 16.50 24.35
2000 24.25 30.00 14.00 30.00
2001 29.50 32.20 19.86 31.90
2002 31.25 35.95 19.75 20.70
2003 20.60 28.28 19.50 27.00
2004 26.97 34.45 26.45 33.38
2005 33.66 37.95 29.02 36.99
2006 36.57 38.31 29.72 38.02
2007 37.28 46.40 36.81 44.73
2008 43.08 46.82 34.48 35.03
2009 37.08 45.54 30.64 45.54
2010 45.57 61.50 44.29
Adidas
Year First High Low Last
1995 9.71 10.07 8.97 9.70
1996 9.72 18.95 9.72 17.00
1997 16.72 34.77 16.72 30.24
1998 30.55 41.99 20.39 23.14
1999 23.58 25.75 16.93 18.63
2000 17.85 18.38 12.39 16.50
2001 16.25 21.00 11.95 20.88
2002 21.00 22.13 15.88 20.25
2003 20.70 22.75 17.27 22.65
2004 23.68 30.21 22.15 29.79
2005 30.25 40.63 28.05 40.09
2006 41.23 43.80 35.15 37.54
2007 37.83 50.64 35.29 50.64
2008 50.93 50.93 21.86 27.09
2009 27.09 38.75 22.73 37.94
2010 38.48 45.20 34.90
© 2010
Page 14
Appendix 4 – calculation of historical NPV and CF
4.5-year Investment
Period 0 (beginning 2006) Period 1 (end 2006) Period 2 (end 2007) Period 3 (end 2008) Period 4 (end 2009)
Dividends 0 117.249 122.132 166.134 213.333
Investment - 10.000.000 0 0 0 15.020.027
Share price 37,45 56,25
Nike Cash dividends 0,44 0,46 0,62 0,80
DCF - 10.000.000 111.666 110.777 143.513 12.532.522
NPV 2.898.478
CF 5.638.874
Period 0 (beginning 2006) Period 1 (end 2006) Period 2 (end 2007) Period 3 (end 2008) Period 4 (end 2009)
Dividends 0 102.314 121.803 121.803 85.262
Investment - 10.000.000 0 0 0 10.757.613
Share price 41,05 44,16
Adidas Cash dividends 0,42 0,50 0,50 0,35
DCF - 10.000.000 97.442 110.479 105.218 8.920.460
NPV - 766.402
CF 1.188.794
© 2010
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Berenberg figures
Period 0 (June 2010) Period 1 (end 2010) Period 2 (end 2011) Period 3 (end 2012) Period 4 (end 2013)
Dividends 0 106.431 156.250 185.688 228.714
Investment - 10.000.000 0 0 0 13.134.058
Share price 44,16 58,00
Adidas Cash dividends 0,47 0,69 0,82 1,01
DCF - 10.000.000 101.363 141.723 160.405 10.993.585
NPV 1.397.076
CF 3.811.141
© 2010
Page 16
Appendix 7 – stock performance
Market to book ratio
Nike Adidas
Market capitalization 27.698 7.902
Total equity 8.693 3.776
Market to book ratio 3,2 2,1
US EU
Average per country 8 2,0-2,5
Nike Adidas
EPS 2006-2009 3,09 2,28
DPS 2006-2009 0,79 0,44
Average Dividend cover ratio 3,9 5,2
US EU
Average cover per country 2,5-3,0 4,5-5,0
US-Retail EU-Retail
Average per sector 6,0 8,0
Price/earnings ratio
Nike Adidas
Average price/earnings ratio 20,9 19,1
US EU
Average cover per country 30-31 20
© 2010
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Appendix 8 – company performance
ROE / earnings yield ratio
Nike Adidas
ROE 18,0% 6,5%
Earnings yield 4,6% 3,1%
ROE / earnings yield ratio 3,9 2,1
Debt/equity ratio
Nike Adidas
Total liabilities 4.557 5.099
Total equity 8.693 3.776
Debt/equity ratio 0,5 1,4
Growth equilibrium
Nike Adidas
Returned earnings 5.451 3.350
Total equity 8.693 3.776
growth equilibrium 63% 89%
© 2010
Page 18
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© 2010
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Abbreviations
CAGR: compound annual growth rate
DPS: dividends per share
EPS: earnings per share
FCF: free cash-flow
NPV: net present value
P/E: price earnings
ROE: return on equity
© 2010
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