14th July 2014
David Moss, manager of the F&C European Equity fund explains why adidas is the real winner of the tournament and why he invests in the sports retailer…
With over 50% of the world’s population estimated to have watched at least some of the World Cup – and up to one billion tuning in for the Final alone – there are few (if any) sporting events with the same global profile.
As Official Sponsor, Supplier and License of the 2014 FIFA World Cup you’d have been hard pressed to overlook adidas in recent weeks. Nine of the teams and all the match officials were sporting adidas kits and the games were all played with the ‘Brazuca’ match ball – a special gold edition used in the Final.
Despite strong sales and the impressive performance of many adidas sponsored teams – both Germany and Argentina sported adidas kits in the Final – adidas’ recent share price performance has been less impressive. There are a number of reasons why it has disappointed recently.
Its brand provides adidas with a crucial competitive advantage – raising barriers to entry and affording them pricing power that enables them to weather fluctuations in raw material costs, improve gross margins and enhance returns on capital. The business is cash generative and its balance sheet sturdy – this strength supports the return of cash to shareholders and we believe that there’s scope for dividends to increase, and with it, total returns to shareholders.
Over the long-term we believe that well-managed, high quality and attractively valued companies – like adidas – will prove to be successful investments. They operate in a global oligopoly where long-term dynamics and strong competitive positioning mean that adidas is ideally placed to grow ahead of its peers. Adidas’ current valuation looks particularly appealing in this context. In our view adidas’ recent underperformance is likely to be a temporary phenomenon and we expect it to continue its impressive track record on a longer-term perspective. As a result we consider it a core position in our portfolios.