As the magnificent seven’s performance pushed the SP500 to a new all-time high, many sectors within the index are still below their all-time high. The consumer discretionary sector is still 4% below it’s all-time high, while the SP500 is 6.37% above it.
Consequently, the relative price to free cash flow ratio of the consumer discretionary sector compared to the SP500 was only lower than today in 2017 in the post great financial crisis period. This suggests the sector may be undervalued compared to the broader market, and it can be expected to close the gap sooner or later.
NIKE’s (NKE) price to free cash flow ratio is one of the cheapest in the past decade, currently sitting around 24. The multiple was only lower in 2020 and 2017 since 2023. This suggests Nike is currently trading at a great valuation from a historical perspective.
Nike’s relative price to free cash flow ratio compared to the consumer discretionary sector seems to be at the bottom of its historical range. This suggests Nike is likely undervalued compared to its sector from a historical perspective.
For Nike, 44% share of its revenue is deriving from the North American region while 28% from the EMEA region. Wholesale distribution represents 56% of the company’s sales while 44% goes through Nike direct. Footwear is the most important segment with 68% of revenue share while the apparels are giving 28% of sales.
18% of the global sportswear market is captured by Nike, while Adidas has an 8.2% market share. Since 2019 Nike and Puma could strengthen their position, while Adidas lost market share.
Nike clearly dominates the footwear market with sales of $29 billion, more than doubling the $13 billion of Adidas the second most prominent brand.
The simplified discounted cash flow analysis suggests Nike is currently 29% undervalued, given analysts expect a 9.15% annual free cash flow growth for the next three years. This number was averaged with the historical free cash flow growth rate of 8.49% since 2017, to project the future cash flows. That suggests a fair share price of 132.
adidas’ (OTCQX:ADDYY) price to free cash flow ratio is the cheapest since 2011, currently sitting around 22. The multiple was only lower after the great financial crisis. This suggests Adidas is currently trading at a great valuation from a historical point of view.
Adidas’s relative price to free cash flow ratio compared to the consumer discretionary sector seems to be at the bottom of its historical range. This suggests Adidas is likely undervalued compared to its sector from a historical perspective.
The simplified discounted cash flow analysis suggests Adidas is currently 66% undervalued, given analysts expect a 12.9% annual free cash flow growth for the next nine years. This number was averaged with the historical free cash flow growth rate of 2.49% since 2017, to project the future cash flows. This approach suggests a fair share price of 273.
For Adidas , each of Asia-Pacific, North America and Europe regions contribute roughly 1/3 of its revenue. Footwear provides 56% of its sales, while Apparels represents 39% share.
Assessing the relative valuation of the two companies, their price to free cash flow ratio shows that Nike and Adidas relationship sits in the middle of their historical range. That suggests neither of them seems to be under or overvalued compared to the other, and their relationship is fairly balanced.
However comparing the undervaluation based on the discounted free cash flow analysis, Adidas seems to be trading at more than two times greater discount to its fair price than Nike.
In terms of price action in the last 1 year, Adidas and Lulu Lemon are leading their peer group, while Nike sits in the middle. Puma and Under Armor are lagging but improving compared to Nike.
Since 1995, the historical average statistics suggest that both Nike and Adidas are trending upwards at least 8 months before and after the Olympics. On average, Adidas grows 30% while Nike grows 25% during the same 16 months period.
Similarly, both 8 months before and after the European soccer championship tends to be a positive period for both brands. During the same 16 months, Adidas historically rallied 18% while Nike grew by 16%.
As in 2024 June the European soccer championship starts, and July the summer Olympics game, 2024 is supposed to be a strong period for both brands based on the historical relationship. The consumer discretionary sector appears to be undervalued compared to the SP500 and it is lagging behind in terms of price action, making it an attractive space to spot for opportunities. If inflation is indeed under control, and the interest rate trajectory is lower, the lagging sectors like discretionary may catch up to the broader market. Nike and Adidas both appear to be trading below it’s fair price estimate, and seems like undervalued from a historical perspective, therefore likely offers great value and opportunity in a statistically strong period.
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