- The summer sports schedule is packed, starting with the European soccer championships and the Olympics.
- It’s not just fans that benefit from the surge in summer sports, but also sportswear brands.
- Insider breaks down 5 reasons to bet on sportswear and 2 stock picks, according to UBS analysts.
- See more stories on Insider’s business page.
Sports fans are rejoicing at the return to a jam-packed summer calendar of sports, kicking off with the UEFA Euro soccer championship next week, soon to be followed by Wimbledon, The Open and the Tokyo summer Olympics.
And if that’s not enough to look forward to, there is also an abundance of major tournaments coming up the following year with the Winter Olympics and the FIFA soccer World Cup.
A busy calendar isn’t only good news for sports-starved fans and athletes eager to perform in front of crowds. It’s also good news for European sportswear companies.
So far this year, European sportswear names have underperformed the market by 10%, because of short-term headwinds and negative sentiment in China, according to a May 18 note from UBS.
More broadly, the European stock market has underperformed the US one over the last year. The STOXX 600 index is up around 23% this year, while S&P 500 index is up around 34%. This has predominantly been down to the European market featuring fewer growth stocks and stay-at-home winners that have performed well throughout the pandemic.
As vaccines are now successfully being rolled out and economies are re-opening, European stocks are set to outperform in the coming months, as the market is more exposed to some of the big recovery plays.
However, the sportswear sector has not been factored into this strategy, many investors have assumed the stocks are stay-at-home plays that capitalize on the demand for casual wear.
UBS analysts, on the other hand, take a different view with the belief sportswear is a reopening play and remain positive on the sector.
Insider outlines five reasons why sportswear stocks are set to crush the market and reverse their underperformance, according to UBS’s report, as well as two of their top stock picks.
5 reasons to bet on sportswear
1. Upcoming sports schedule
“Our 20-year analysis of share prices around major sporting events such as the World Cup, Euros and the Olympic Games shows that the sportswear stocks have historically outperformed the market ahead of these,” UBS analyst Zuzanna Pusz said.
Upcoming events, such as the UEFA Euro Cup, Olympics and FIFA World Cup could drive a catch-up with the market, Pusz said. This would be down to a general favorable environment for sports driving demand and merchandise sell-in ahead of the events.
2. Easing of negative sentiment in China
European retail and luxury brands have faced a backlash in China for refusing to source cotton produced in the province of Xinjiang over claims of forced labor in the region.
The analysts expect second-quarter sales for European sportswear to be hit by the sales drop in China, but these should be offset by other trends that will support sales performance and drive positive earnings momentum.
They expect a gradual normalization of the situation in the region in the coming quarters, which should create further tailwinds for the sector.
3. Favorable FX environment
European sportswear names faced a slew of analyst estimate downgrades because of the strengthening the euro and, in turn, associated losses from their foreign exchange exposure.
The analysts expect in the second half of the year to see a more favorable foreign exchange environment that may bring some softening in the value of the euro, which could turn those losses into gains.
4. Easing of supply-chain issues
The sportswear industry has been impacted by supply-chain issues associated with port congestion in the US and delays in deliveries following the blockage of the Suez Canal in April.
These shortages meant brands had delays getting deliveries to retailers, which impacted their sales growth.
These issues should also be starting to ease.
5. Reopening beneficiary
“Many investors in our view incorrectly see the sportswear industry as a COVID beneficiary due to the increased demand for casualwear during the pandemic, thus forgetting about the relatively high sales exposure of the key brands such as adidas and Puma to team sports category (estimated >10% of sales),” Pusz said.
“As such, we believe that easing of pandemic-related restrictions globally will drive a resumption of team sports benefitting sales of the major sportswear brands, which has been also confirmed by the retailers.”
To play the trend, the UBS analysts outline two stock picks to buy: Adidas (ADDDF) and Puma (PMMAF).
“Looking at market data 3/6/9/12-months before 21 sporting events (FIFA World Cup, The UEFA Football Championship, Summer Olympics, Winter Olympics) that took place between 1998 and 2018, we note that adidas and Puma, on average, outperformed the market (MSCI World Index) by +7%/+12%/+16%/+24% in the 3/6/9/12-month period European Sportswear ahead of the start of the events,” Pusz said.
Market capitalization: $17 billion
Price target (as of report published): €100.30
Price target upside: 9%
Market capitalization: $71 billion
Price target (as of report published): €363
Price target upside: 22%
Source: Read Full Article