Adidas Is Facing the ‘Swoosh’ Test

(Bloomberg) -- Deal or no-deal is the mantra of the week with trade talks, especially after U.S. Secretary Steven Mnuchin raised hopes of an agreement. While the market worries about a full-blown trade war, it hasn’t harmed the stock of German sportswear giant Adidas this year. Nike’s earnings tonight may hint at what’s next for the DAX’s top performer.

Adidas shares are up 49% this year, beating peers worldwide and all Euro Stoxx 50 members with the exception of Airbus. The outperformance against arch-rival Nike, up a mere 13%, is even more striking.

The stellar performance hasn’t stopped Berenberg and Goldman Sachs from raising their view on Adidas this week. Both brokers have set their price target much higher than most analysts, seeing about 15% upside from the current level as margins improve and the stock closes the valuation gap against Nike. The consensus isn’t so optimistic.

The thing is, Adidas shares don’t look expensive, even after their stellar gains. Their estimated price-to-earnings is currently about 10% lower than Nike, and other metrics like EV/Ebitda are even showing a higher discount. The company has made an impressive turnaround, improving distribution, margins, and gaining market share steadily for the past 10 years, a trend likely to continue given high barriers to entry, Berenberg says.

Nike and Adidas have approximately 15% and 11% market share of the worldwide sportswear market respectively. The sector has recorded a 7% annual growth over the last five years, compared with only 4% for the broader apparel and footwear category, driven by a consumer trend toward fitness and a healthy lifestyle, according to Berenberg. This is reflected in share performances: none of the largest apparel companies have managed to keep pace with Adidas this year.

Trade jitters haven’t produced any visible negative effect so far. Still, the possible new round of U.S. tariffs that could be imposed on China, would likely hit apparel and footwear. Adidas though has lower U.S. exposure than Nike, putting it in a better situation in the event of a trade war, SocGen analysts wrote earlier this month.

That said, both companies produce a lot more items in Vietnam than in China now, so the targeting of Vietnam by Trump wouldn’t be good news for either of them. Comments from Nike on tariffs will be under scrutiny this evening.

In the meantime, Euro Stoxx futures are trading up 0.3% ahead of the open.

SECTORS IN FOCUS TODAY:

• Watch miners after iron ore prices in China surged amid supply concerns and speculation that steel production curbs in China may be less severe than anticipated. Watch Rio Tinto, BHP, Anglo American and Ferrexpo. Also watch steelmakers including ArcelorMittal, Voestalpine, Evraz, as rebar futures trade higher.
• Watch oil as Iran is due on Thursday to breach its 2015 nuclear deal for the first time. United Nations members also expressed concern that if Iran doesn’t take a step back, it could sleepwalk into war.
• Watch the pound and U.K. stocks after the leader in the Prime Minister race Boris Johnson zigzagged back to a softer Brexit stance, saying there was a "million to one" chance he’d lead Britain into a chaotic split from Europe.
• Watch for further comments on trade ahead of the G-20 summit after President Trump threatened to slap billions more in tariffs on Chinese goods, should the trade talks falter. Bloomberg Economics estimate a deal could save the global economy $1.2 trillion.
• Watch crypto currencies and stocks related to them after Bitcoin topped the $13,000 mark on Wednesday. Short interest is at a record high and unwinding may continue to push prices higher.

COMMENT:

• “While we continue to expect a US-China handshake as soon as in the G-20 Summit, we believe that trade policy uncertainty is likely to persist and to continue weighing on economic prospects,” Citi economists write in a note. “Policy rules suggest that additional easing is not guaranteed unless increased uncertainty comes along with a tightening in financial conditions. However, the limitations of monetary policy to deal with real shocks and persistent tariff-induced uncertainty remain first-order challenges.”

COMPANY NEWS AND M&A:

• Elliott Urges Bayer to Settle Roundup Suits and Reap Rewards
• VW Board Is Said to Put Ford Alliance on Agenda for July Meeting
• Thyssenkrupp Still Plans Minority IPO Elevator Unit: Spokesman
• After $7 Billion Flees, H20 Plans to Bury Toxic Debt in New Fund
• Macron Says ‘Nothing Justifies’ Changing Renault-Nissan Stakes
• Swiss Re’s ReAssure Sets IPO Price Range at 280p to 330p/Shr (1)
• Zumtobel Sees Higher Revenue, Improved Margin as Costs Fall
• Nokia Wins 5G Order With Zain Saudi Arabia, Now Has 43 Contracts
• Infineon Eyes Over $1b of Revenue in South Korea: Handelsblatt
• Casino Reviewing Plan To Simply Structure In Latin America
  • France’s AMF Finds Fault With Casino Fin Communication: Echos
• Arcelor May Close Italy Plant on Legal Concern: Repubblica
• Vestas Has Never Been More Back-End Loaded, CFO Tells Borsen
• KBC Summoned To Answer Charges Before Criminal Court in Ghent
• Voltalia Signs 25-Year Power Purchase Deal With France’s SNCF
• Eurobank, Bravo in Talks for Sale 20% of Notes in Project Cairo

NOTES FROM THE SELL SIDE:

• Citi downgrades Carlsberg to sell saying shares seem increasingly vulnerable as earnings momentum fades. Broker sees 2Q as tough with weather-related issues across key Western Europe markets and competitive pressures in Eastern Europe.
• Continental’s guidance appears to be at risk, with global car sales likely to be just as disappointing in 2Q and no reason to believe co. can post improved quarterly performance, Bankhaus Lampe says in note lowering rating to sell from hold.

TECHNICAL OUTLOOK for Stoxx 600 index:

• Resistance at 392.7 (July 2018 high); 397.9 (May 2018 high)
• Support at 381.3 (50-DMA); 374.5 (61.8% Fibo)
• RSI: 54

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

• Resistance at 3,514 (May high); 3,596 (May 2018 high)
• Support at 3,410 (50-DMA); 3,403 (61.8% Fibo)
• RSI: 58.3

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

• B&M European upgraded to overweight at JPMorgan; PT 3.90 Pounds
• Flughafen Wien upgraded to buy at HSBC; PT 42 Euros
• Grifols upgraded to overweight at JPMorgan; PT 20 Euros
• Kainos upgraded to hold at Panmure Gordon; PT 5.30 Pounds
• Nilfisk upgraded to buy at ABG; PT 230 Kroner
• Retail Estates Upgraded to Buy at Kepler Cheuvreux; PT 85 Euros
• SocGen upgraded to buy at Independent Research; PT 30.50 Euros
• TomTom raised to equal-weight at Barclays; PT Set to 9.50 Euros

DOWNGRADES:

• Abcam downgraded to add at Peel Hunt
• Aeroports de Paris downgraded to reduce at HSBC; PT 135 Euros
• Carlsberg downgraded to sell at Citi
• Chr. Hansen downgraded to underweight at JPMorgan; PT 570 Kroner
• Continental downgraded to sell at Bankhaus Lampe
• Ebro Foods downgraded to market perform at BBVA; PT 20.20 Euros
• Rio Tinto downgraded to market perform at BMO; PT 47.50 Pounds
• SOITEC downgraded to hold at Jefferies; PT 101 Euros
• Senior downgraded to equal-weight at Barclays; PT 2.10 Pounds

INITIATIONS:

• AlzChem Group rated new buy at Baader Helvea; PT 3 Euros
• Andritz rated new equal-weight at Morgan Stanley; PT 40 Euros
• Stemmer Imaging rated new buy at Berenberg; PT 39 Euros
• Trelleborg rated new equal-weight at Morgan Stanley
• Ubisoft rated new overweight at Consumer Edge Research
• Valmet rated new equal-weight at Morgan Stanley; PT 24 Euros

MARKETS:

• MSCI Asia Pacific down 0.3%, Nikkei 225 up 0.9%
• S&P 500 down 0.1%, Dow little changed, Nasdaq up 0.3%
• Euro down 0.12% at $1.1355
• Dollar Index up 0.15% at 96.36
• Yen down 0.27% at 108.08
• Brent down 0.3% at $66.3/bbl, WTI down 0.4% to $59.2/bbl
• LME 3m Copper up 0.3% at $6005/MT
• Gold spot down 0.2% at $1406.8/oz
• US 10Yr yield up 1bp at 2.06%

ECONOMIC DATA (All times CET):

• 9am: (SP) April Total Mortgage Lending YoY, prior 23.2%
• 9am: (SP) June CPI MoM, est. 0.0%, prior 0.2%
• 9am: (SP) June CPI YoY, est. 0.6%, prior 0.8%
• 9am: (SP) June CPI EU Harmonised MoM, est. 0.0%, prior 0.2%
• 9am: (SP) June CPI EU Harmonised YoY, est. 0.7%, prior 0.9%
• 9am: (SP) April House Mortgage Approvals YoY, prior 15.8%
• 10am: (IT) June Consumer Confidence Index, est. 111.4, prior 111.8
• 10am: (IT) June Manufacturing Confidence, est. 101, prior 102
• 10am: (IT) June Economic Sentiment, prior 100.2
• 11am: (EC) June Economic Confidence, est. 104.8, prior 105.1
• 11am: (EC) June Business Climate Indicator, est. 0.29, prior 0.3
• 11am: (EC) June Industrial Confidence, est. -3, prior -2.9
• 11am: (EC) June Services Confidence, est. 12.4, prior 12.2
• 11am: (EC) June Consumer Confidence, est. -7.2, prior -7.2
• 2pm: (GE) June CPI MoM, est. 0.2%, prior 0.2%
• 2pm: (GE) June CPI YoY, est. 1.4%, prior 1.4%
• 2pm: (GE) June CPI EU Harmonized MoM, est. 0.1%, prior 0.3%
• 2pm: (GE) June CPI EU Harmonized YoY, est. 1.3%, prior 1.3%

* For a daily wrap on developments in European equity capital markets, click here

--With assistance from Lisa Pham, William Canny and Gaurav Panchal.

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon

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