Adidas Traders See World Cup Equalizer After 16% Slump

Adidas AG’s 16 percent drop in 2014 is leaving options traders unshaken as they bet that the World Cup soccer tournament will help it recover.

Options that appreciate as shares gain cost the most in almost four years relative to bearish ones, according to data compiled by Bloomberg. Adidas has risen 3.8 percent after falling to a one-year low on March 24.

The world’s second-biggest sporting-goods manufacturer signed a partnership in November with FIFA, organizer of the World Cup, to extend a commercial relationship to 60 years. That’s giving investors reason for optimism, according to Jean-Paul Jeckelmann at Banque Bonhote & Cie. Adidas Chief Executive Officer Herbert Hainer said last year that soccer sales will rise to a record in 2014. The tournament, where Adidas is supplying the official match ball and uniforms to eight teams, starts on June 12 in Sao Paulo.

“Investors are shrugging off the negative news and are focusing on June, when it’s just going to be soccer, soccer, soccer,” Jeckelmann, who helps manage $1.5 billion in equities as chief investment officer at Banque Bonhote in Neuchatel, Switzerland, said in a March 24 interview. “The sector tends to do well going into the main competitions. That should help the stock.”

World Cup

Adidas is battling with Nike Inc., the biggest sporting-goods retailer, for supremacy in soccer. The Herzogenaurach, Germany-based company said sales from that market will rise to an all-time high of 2 billion euros ($2.8 billion) this year. Adidas has been a FIFA sponsor since the 1970 World Cup, and the partnership got extended through 2030.

The cost of Adidas puts protecting against a 10 percent drop in the shares is 0.04 point higher than that of calls betting on a 10 percent jump, according to three-month implied volatility data compiled by Bloomberg. The price difference reached 0.27 on March 17, the lowest since April 2010.

The stock has dropped 16 percent from its record on Jan. 22 as tension rose between Russia and the West over Ukraine. Russia is Adidas’s third-largest market worldwide, according to company spokeswoman Katja Schreiber, who declined to comment on the options trading. The losses left the shares trading at 17.9 times estimated earnings, 28 percent below Nike’s valuation, data compiled by Bloomberg show.

Ukraine Crisis

For Trung-Tin Nguyen, a Zurich-based hedge-fund manager at Trimax Capital AG, Adidas’s outlook amid the Ukraine crisis are reasons not to be too optimistic on the shares.

The company’s earnings forecast on March 5 fell short of analysts’ estimates, and Adidas cited weakness in currencies such as the Russian ruble and Argentine peso. Profit this year will be between 830 million euros and 930 million euros this year, and CEO Hainer said the crisis in Ukraine poses a further risk to the business.

“I’d like to know who’s so bullish while the outlook is so muted,” Nguyen said in an interview on March 21. “There’s a foreign-exchange risk, and the company’s sales exposure to Russia does intensify that issue. While the World Cup could be a trigger, it’s more of a hype than anything else, and the revenue resulting from it may well be overestimated.”

VStoxx Index

The VStoxx Index, which measures expected volatility on the Euro Stoxx 50 Index using options prices, gained 0.3 percent to 17.64 today. The gauge has advanced 2.2 percent this year.

Adidas traders hold more bullish options than bearish ones. There were 95,424 calls outstanding on March 24, compared with 83,399 puts, and five of the six most-owned contracts were bullish, data compiled by Bloomberg show. Calls betting on a 13 percent jump to 88 euros by June had the largest open interest among bullish wagers, the data show.

“With the significant drop we’ve seen this year, investors see it as a good entry level before the significant FIFA World Cup event in Brazil,” Bismark Badilla, a fund manager at Lexinta AG, where he oversees $300 million, said in an interview from Zurich. “Not only will the company be in the news cycle at least through the second quarter of 2014, but it may also provide a boost to profit and revenue. There’s positive surprise potential after the company’s lower outlook.”

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