Just under four months until the ball starts rolling at the European Football Championship in Germany. There is a lot at stake for Germany’s major sporting goods manufacturers: How attractive are Adidas and Puma after the recent stock market disappointments?
There’s nothing like a good sporting rivalry: Roger Federer vs. Novak Djokovic, Lionel Messi vs. Cristiano Ronaldo or Real Madrid vs. FC Barcelona. When the Swiss national team meets the hosts at the European Football Championship in Germany on June 23rd, it will not only be about progressing to the round of 16, but also about the rivalry between the sporting goods manufacturers Adidas and Puma, who supply the two teams.
What has electrified millions of fans around the world in the world of sports has also been a duel between the two sporting goods companies on the German stock exchange for years. The competition between the two Bavarian companies is particularly explosive due to their history, which has already been the subject of many a film adaptation: Adidas and Puma are, after all, brother companies in the truest sense of the word.
Adi Dassler, founder of Adidas, in the Gebrüder Dassler shoe factory.
Photo: Adidas
The story began in the early 1920s in the small German town of Herzogenaurach, when brothers Adolf (Adi) and Rudolf (Rudi) Dassler started making sports shoes in their mother’s laundry room. The brothers founded the Gebrüder Dassler shoe factory together in 1924, which quickly made a name for itself for producing high-quality sports shoes. The first international attention came when the German athletes at the 1928 and 1936 Olympic Games wore Dassler shoes.
Brotherly dispute leads to the founding of Adidas and Puma
Despite the initial success, tensions arose between the brothers, which escalated during the Second World War and ultimately led to the division of the company in 1948: Adi Dassler founded Adidas (a combination of his nickname Adi and the first three letters of his last name), while Rudi Dassler Puma founded. The company, originally founded with the name Ruda, was shortly afterwards renamed after the agile Puma cat.
After the separation, both companies quickly developed into two of the best-known and most successful sportswear brands in the world. A key moment for Adidas was the 1954 Football World Cup (“The Miracle of Bern”), in which the German national team, equipped with Adidas shoes, sensationally won the title. The spectacular World Cup victory helped Adidas gain worldwide recognition.
Pelé 1970 in Puma-Outfit.
Photo: Puma
Puma also secured prestige successes – for example with the equipment of the Brazilian football legend Pelé, who was during the Soccer World Cup 1970 in Puma shoes played and thus made the brand prominent on the global stage. As a result, Adidas and Puma experimented with innovative designs and technologies in their products, leaving a lasting footprint in pop culture (as in the cult hit «My Adidas» from Run-DMC).
Botched handover leads to deep crisis in the 1990s
But in both cases, the botched handover to the next generation was followed by bitter phases of crisis over the course of the 1990s, which each ended in the sale of the Dassler heirs. Foreign investors recognized the value of the world-famous German brand companies and acquired majority shares, only to sell them later.
The Swedish private equity company Proventus/Aritmos acquired Puma in 1990 and sold its shares to the luxury goods giant Kering in 2007 – after a highly successful restructuring. He threw the majority of his shares onto the market in 2018. Adidas, in turn, passed through the hands of the infamous French entrepreneurs Bernard Tapie (1992) and Robert Louis-Dreyfus (1994) before going public in 1995.
What is remarkable in both cases is the cyclicality of business development: at Adidas and Puma, the development was characterized by real eras that ultimately resembled a rollercoaster ride. After the near-bankruptcy in the early 1990s, Puma experienced a real boom for a decade under the young manager Jochen Zeitz, who took over the CEO position at the age of 30, but this ebbed when it was integrated into the Gucci group Kering.
Under its own direction, the big cat then made another big leap and even set new all-time highs on the stock market in 2021. Adidas has had a steady rise since its IPO in 1995, but this was interrupted several times by dips and price halvings – first at the end of CEO Herbert Hainer’s term in office in the mid-1900s, but then also under Kasper Rorsted in 2022.
2024: Adidas and Puma again in crisis mode
In 2024, the two German sports pioneers will be in crisis mode: four months before the start of the European Football Championship in their own country, both stocks are looking for form, as the false start to the new stock market year proves. The Adidas stocks started the new stock market year with losses, but were at least able to catch up in February…
…while the shares of the sister company, just two kilometers away, have been down 14% since the beginning of January.
In both cases, the trigger is the disappointing business development. Adidas, which has been supplying the reigning world champions Argentina for decades (most important source of sales: Lionel Messi jerseys), has ruined its preliminary balance for 2023 due to the massive devaluation of the peso. And not only that: the DAX group is still suffering from the consequences of the ended cooperation with scandal rapper Kanye West. At least his Yeezy sneakers are no longer being written off, but are being sold to cover their costs.
CEO Bjørn Gulden, headhunted from Puma and in office as CEO for around a year, was able to report a group profit of €268 million for 2023 a few weeks ago – instead of an expected loss. However: In the previous financial year, the three-stripe company had achieved a whopping plus of €669 million. Sales are also on a downward trend: with sales of €21.4 billion, the decline was 5% last year.
“Of course we know that our financial results are not good,” Gulden admitted contritely to analysts at the end of January. 2024, which actually offers maximum tailwind with the European Championships and the Olympic Games, is also likely to be a year of transition: Gulden announced an increase in sales of just 5% and a consolidated profit of at least €500 million – the return to double-digit sales growth is only expected in 2025 expected. Analysts expect sales of €22.56 billion in 2024, up 5.4%, and earnings per share of €2.97.
Puma: bitter false start in 2024
The setbacks at Puma were similarly severe. The smaller Herzogenaurach-based group also provisionally informed investors at the end of January about weaker business development – primarily due to the devaluation of the peso. Sales growth practically came to a standstill with an expected increase of just 1.6% to €8.6 billion, and consolidated earnings halved to around €305 million. In the fourth quarter, Puma even recorded a decline in sales of almost 10% to just under €2 billion.
What will happen next in 2024 seems questionable given the vague outlook. The new CEO Arne Freundt, who has been in office since the end of 2022, promised currency-adjusted sales growth in the mid-single-digit percentage range, but avoided statements in the reporting currency, the euro. In 2023, currency-adjusted sales growth was 6.6%. In 2024, there is a risk of both revenue and profit stagnation on a euro basis.
Investors reacted accordingly harshly to the bad news and sent Puma shares falling by double digits. At a current price of just over €40, the shares of the third-largest sporting goods manufacturer in the world in terms of sales are currently only just above the six-year low of €37 set at the end of January.
The price drop compared to the all-time high set at the end of 2021 is almost two thirds. But the slump is also steep in the short term: at the beginning of December, the price boards were still showing prices of more than €60 – so the discount was almost 35% within three months. Puma is currently valued on the stock exchange at just €6.4 billion.
Puma stock with an interesting opportunity-risk ratio
From a contrarian perspective, does the sharp sell-off now offer an entry opportunity?
Analysts have recently expressed skepticism in large numbers. After the profit warning a few weeks ago, numerous large banks downgraded Puma shares and, in some cases, drastically reduced their price targets. Royal Bank of Canada (RBC), for example, lowered its price target from €64 to €42, UBS from €60 to €41, while JPMorgan sees the shares at just €50 instead of €58 in twelve months. “The Puma is no longer the fastest cat,” said the RBC analyst, criticizing the MDax group.
The bearish situation makes countercyclical positioning attractive if you have the necessary patience and assume that the global economy will not slide into recession. Measured against historical comparisons, Puma offers an interesting risk-reward ratio for contrarians.
The price-to-sales ratio, which is a more reliable indicator given the volatile profit development, is currently at a historically low level of 0.72. The last time Puma had a similarly favorable valuation was during the financial crisis and in the crisis year of 2015. Analysts also expect earnings per share of €2.51 in 2024, which corresponds to a moderate P/E ratio of 16.
Adidas: rated significantly higher, but no less challenged
Adidas, meanwhile, has a sportier valuation: the second most valuable sporting goods manufacturer after Nike is currently worth five times as much as Puma at €31.5 billion. Measured by the price-to-sales ratio (1.4), it is almost twice as expensive as Puma. When it comes to the forward-looking P/E ratio, which represents a transitional value at Adidas (55) due to the volatile profit development, the gap widens even further (Puma P/E: 16.5).
Not least because of the history and the firm anchoring of the Adidas brand in the world of sports, the stock market is prepared to grant the DAX group a hefty valuation premium – but a valuation is twice (sales) or almost four times (profit) as high as justified for Puma? The mixed business development of Adidas and the increasingly tough competition with industry leader Nike speak against this.
Puma also has the joker of being able to score points outside of the classic sports business, for example in the lifestyle sector. He was able to give the big cat brand additional shine in the noughties and 10s. In addition, a turnaround bet also appears more promising based on arithmetic: Given that sales are two and a half times smaller, an increase in business at Puma would have a stronger impact on the balance sheet – and presumably on the share price – than at Adidas. Shareholders’ entry is also sweetened with a dividend yield of just under 2% (distribution: €0.82).
Anyone who wants to enter the field of sporting goods manufacturers has more upside potential with Puma shares than with its more established and much higher valued sister company, whose challenges hardly appear smaller.
2024-02-23 03:46:42
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