Warren Buffett Sees Potential In Germany, I See A Moat In Adidas

Warren Buffett (BRK-A) has started to buy in Europe, more specifically in Germany. He stated that Germany is a great country, with a vigorous and productive economy.  Therefore, we shouldn’t be surprised that he bought a German supplier of motorcycle equipment and he may be up for more (Source: Fortune).

I have mixed feelings in relation to the European economy. In my perspective, the current set of European policies is clearly off-mark. However, the QE will be an important driver for equities (as happened in the US case). Therefore, the already depressed EUR and some quality assets at depressed prices might represent the entry point that some investors were waiting for.

Buffett’s stance on Germany should be seen as an indicator that there are interesting opportunities in the old continent. I also have been paying some attention to some European equity markets like Germany and Spain. In Germany, one of the best companies that I have found is Adidas (ADDYY). The last time I wrote about Adidas was in September 2014; since then the stock price in EUR has climbed 29%. Unfortunately, the EUR had a steep decline during the period, completely offsetting the stock price gains (for the US-based investor).

The investment case for Adidas

Adidas is a powerful sports brand that dealt with significant problems during 2014. The Russian crisis, emergent markets’ currency depreciation and oversupply in the golf market marked a year where the earnings were a long way off-track. I interpret this as one of those cases where the company had everything going wrong for them.

Photo Credit: Kick Photo

Thanks to all the scares, the company is making huge efforts to improve its operations in order to have a better cushion for unpredictable events like happened last year. The strategy is divided in two major aspects:

  1. Increasing the sales in Adidas’ own stores: Adidas is looking to sell more items in its own retail channels, either online and brick and mortar stores. The company has been trying different approaches in the retail space and now is setting up a revamped retail strategy to apply until 2020. Obviously, the company is expecting to improve its margins by following this approach.
  2. Improving the feedback loop between sales and supply-chain: Adidas wants to reduce its inventory risk by having better communication channels between its sales points and its supply chain and logistics. This is a clear reaction to the excess of inventories that affected its TaylorMade golf brand last year. One way the company intends to do this is by prioritizing its own stores plus the online channel instead of focusing on third parties. Photo: Kick Photo

The previous two points highlight the biggest worry affecting the Adidas management team: speed-to-market. I think that improvements in this field should be welcomed but it worries me that the company lacks some identity on the marketing side. In this regard, the company needs a clear boost like the one that Robert Louis-Dreyfus gave to Adidas, back in 1994 when he left Saatchi & Saatchi to join the German sports brand.

Final remarks

Adidas is a good company with a great brand. Unfortunately, it is not a great company, it is just a good company. This does not mean, however, that Adidas is a bad investment. It is trading at 28 times 2014 earnings, and investors are expecting a recovery in the near future. If we use as a reference the 2013 earnings, Adidas is trading at a multiple of 20. Therefore, a recovery is pretty much discounted in the current stock price. What it is not discounted is the power and attractiveness of the brand that acts as a safety net for the underlying business. Borrowing Warren Buffet’s mindset of the competitive moat, we can argue that Adidas is a good enough brand to confer a good protection to its business.


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