Published On: Mon, Mar 6th, 2017

Will Adidas deliver on its momentum? – #SaxoStrats


Despite the positive trend, we are issuing a negative view on Adidas shares before the company’s fourth-quarter earnings release on Wednesday at 0630 GMT. Analysts estimate on average that Q4 revenue grew 12.5% from last year, more than twice the growth rate expected for Nike. So why are we negative on the stock?

Compared with its peers, Adidas scores negatively on all other major equity factors, except momentum. The valuation is above average, and it even comes with lower quality (return on capital) than the industry. The shareholder yield is also lower and realised volatility is higher than the industry. The recent 12% run-up in the share price is also something that normally translates into strong mean reversion effects. With a 12-month forward P/E ratio at 32.6x, expectations are insanely high for a manufacturer of shoes and sport equipment. The execution risk for the new management is high.

Source: Saxo Bank (Quantitative Strategies team) 

The key focus in the Q4 earnings report will be the growth outlook for the North American market, which has recently seen a strong turnaround for Adidas as the company has succeeded in building its brand. Operating margins still trail competitors, and that will also be in focus.

The average absolute price change over Adidas’ latest earnings releases is 3.6%. So, with at-the-money put options trading at 1.7%, the market seems to be under-pricing any downside risk from Adidas not meeting expectations. ATM calls are currently around 25-30% more expensive than puts over the earnings release, despite twice the volume transacted in puts compared with calls.

Our price target for after the earnings release is €150, representing the recent equilibrium price before a sell-side firm raised the stock to “buy” on February 27. Our price target represents a 6.7% decline from current price, which is almost twice the historical move over Adidas’ earnings releases.

Management and risk description

Given the strong price momentum and the fact that the company reports earnings on Wednesday, we want to protect our negative view from any price jumps. The most sensible choice to achieve that goal is to buy put options on Adidas shares. This strategy will lock in our maximum loss and protect our short position against Adidas exceeding expectations for the 2017 outlook.

Adidas (ADS) weekly share price

Source: Saxo Bank


Entry: buy put options on Adidas shares at €2.75, with a strike at €160 and expiry on March 17. The premium translates into 1.7% of the underlying.

Stop: since we are long puts our maximum loss and essentially our stop is the €2.75 or 1.7% of the underlying. Remember that with a single put contract you are buying the right to sell 100 shares, so the maximum loss per contract is €275 before any commissions etc.

Target: €150 based on our bet that the stock price is discounting too high expectations that could be missed on Wednesday.

Time horizon: short term as the puts expire in 10 trading days.

— Edited by John Acher

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