Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Hanesbrands Inc (HBI, Financial). The stock, which is currently priced at 3.57, recorded a loss of 5.8% in a day and a 3-month decrease of 21.7%. The stock's fair valuation is $13.54, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Risk Factors in Hanesbrands (HBI, Financial)
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Hanesbrands should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of 1.58, and These indicators suggest that Hanesbrands, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
What is the Piotroski F-score / Altman Z-score?
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall into three categories: profitability, leverage/liquidity/ source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. Hanesbrands's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Introduction
Hanesbrands manufactures basic and athletic apparel under brands including Hanes, Champion, Playtex, Maidenform, Bali, Berlei, and Bonds. The company sells wholesale to discount, midmarket, and department store retailers as well as direct to consumers through stores and e-commerce. Hanesbrands is vertically integrated as it produces more than 70% of its products in company-controlled factories in more than three dozen nations. Hanesbrands distributes products in the Americas, Europe, and Asia-Pacific. The company was founded in 1901 and is based in Winston-Salem, North Carolina.
Analysis of Hanesbrands's' Profitability
Firstly, let's address profitability. One significant component of the F-Score is a positive return on assets (ROA). A closer look at Hanesbrands's ROA reveals a worrying trend of negative returns. This indicates the company's inability to generate profit from its assets - a fundamental concern for any investor.
Let's delve deeper into Hanesbrands's financial health by examining the decline in its return on assets (ROA) over the past three years. The data indicates 2021: -4.75; 2022: 5.91; 2023: -5.91, when expressed in percentages. Such a decrease is concerning, as the Piotroski F-Score penalizes companies with lower current ROA compared to the previous period. This ongoing decline highlights another potential risk associated with investing in Hanesbrands.
Leverage, Liquidity and Source of Funds: A Worrying Trend
Assessing the aspect of leverage, liquidity, and sources of funds, Hanesbrands demonstrates an alarming rise in its debt-to-total assets ratio over the past three years. The provided data shows 2021: 0.57; 2022: 0.58; 2023: 0.67, expressed as percentages. A higher debt ratio suggests that Hanesbrands is increasingly financing its assets through debt, thereby escalating its financial risk. The Piotroski F-Score views this as a negative indicator, further cautioning investors about Hanesbrands.
Examining Hanesbrands's financial stability, there's a notable decrease in its current ratio over the past three years, as shown by the data 2021: 1.60; 2022: 1.70; 2023: 1.67, which is expressed as percentages. The current ratio is a key indicator of a company's short-term financial health, as it gauges the ability to cover short-term liabilities with short-term assets. A declining current ratio suggests that Hanesbrands's liquidity and capability to manage immediate financial obligations are deteriorating.
Operating Efficiency: A Darker Picture
Lastly, concerning operating efficiency, the Piotroski F-score examines changes in gross margin and asset turnover. Regrettably, Hanesbrands follows a discouraging trajectory with a decrease in gross margin percentage over the past three years, as demonstrated by the data provided: 2021: 29.44; 2022: 38.06; 2023: 33.44 (expressed in percentages). This contraction in gross margin suggests that Hanesbrands is grappling with either an escalation in the cost of goods sold or dwindling prices - both of which are inauspicious indicators for profitability.
Conclusion
While the Piotroski F-score is not the only lens through which to view a potential investment, it is a robust and comprehensive tool for evaluating a company's financial health. Unfortunately for Hanesbrands, its current score suggests potential troubles. These include a decline in return on assets, a high debt-to-asset ratio, and a decrease in gross margin percentage. These indicators, combined with a low Altman Z-score, suggest that Hanesbrands may be a value trap. Investors should tread carefully and conduct thorough due diligence before considering an investment in Hanesbrands.
GuruFocus Premium members can find stocks with high Piotroski F-score using the following Screener: Piotroski F-score screener .
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
