We set a €290 target price for Adidas on a 12-month basis, built on a DCF valuation. Our DCF model comprises a 10-year explicit stage and a terminal value based on a 3.3% long-term growth assumption. We have a WACC of 8.5% based on a risk-free rate of 4%; an equity risk premium of 4.9%, in line with Citi estimates for their end-market revenue exposure; and an adjusted beta of 1.2.

The following risks could impede the share price from reaching our target price:

Macroeconomic Risks. Growth in the sporting goods industry is dependent on consumer spending. Whilst adidas has a broad geographical portfolio, an abrupt economic downturn would pose a risk to sales development.

Input Cost Risks. Raw materials account for c.60% of the group’s cost of sales. The prices of rubber, cotton, polyester, or other materials are subject to the risk of sharp price changes.

Customer Risks. adidas works with a few key customers, which have the ability to exert pressure on group margins through their scale and bargaining power. A number of these customers are also developing own-branded offers, increasing the competitive environment. 

Currency risk. The biggest currency risk arises from a mismatch of the currencies required for sourcing (primarily dollars) versus the denomination of sales. A strengthening in the US dollar would therefore exert pressure on input costs. We note that the group hedges currency on a rolling 12-24-month basis in order to provide visibility on any pressures from currency fluctuations.

If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. Conversely, if any of these factors proves to have less of an effect than we anticipate, the stock could outperform our target.