About 18 months ago, Hanesbrands Inc. (HBI, Financial) sold for nearly $35 per share. Today those same shares sell for about $22. Is this an opportunity for a patient investor to realize outsize returns, or is this a classic value trap with prices likely headed further south?
In my humble opinion, Hanesbrands is an opportunity for a close look for three major reasons:
1. The company has a solid history of EPS growth and is well-positioned to continue increasing profitability metrics into the future.
2. At current prices, the price-to-value relationship is favorable.
3. Hanesbrands' CEO recently bought nearly $515,000 worth at prices above today.
A history of growth
Hanesbrands offers well-known brands such as Hanes, Playtex, Champion, Bali, L’eggs and Wonderbra among others. The company has a history over the past decade of growing earnings, albeit through acquisition which has at times received a lukewarm response from the market.
To demonstrate Hanesbrands’ historical EPS growth, have a look at the graphic below courtesy of FastGraphs. The orange line represents the trend in EPS growth over the past 10 years. This suggests management has been effective over the long term in making decisions to steadily grow earnings.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Of course that is backward-looking, so research was conducted to determine the prevailing analyst view for Hanesbrands growth on fundamental metrics. Going forward over the next three to five years, it is reasonable to expect the following growth rates: sales +9.5%; cash flow +14%; earnings +15%; dividends +18% and book value +25%. In my view, these rates seem achievable because they are in line with the company's past experience and because Hanesbrands continues to do a very effective job executing its strategies and leveraging its brands.
Shares are cheap right now relative to Hanesbrands' history
It seems reasonable to assess a company’s own historical valuation to get clues for the future.
In order to recognize the price-to-value relationship, again FastGraphs offers an effective way to demonstrate the data. Note that the blue line represents Hanesbrands’ normal PE ratio, the orange line represents earnings growth at a standard 15X and the black line is the market price. Situations where the black price line is below the normal PE blue line are often opportunities for further study, and such is the case with Hanesbrands right now.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
As we can see, the normal PE ratio over the past 10 years has been 14.3X earnings (represented by the blue line). Today the PE is 11.3X. Given the company's effective actions, it is entirely reasonable that the share price will return to "the norm". If so, this is an opportunity.
If we assume earnings estimates hold for next year and we apply the company’s own normalized 14.3X multiple, then a price target of $30 is not unreasonable.
As the saying goes, there are lots of reasons for insiders to sell a stock, but only one reason to buy. It seems noteworthy that just four months ago, Hanesbrands' CEO bought nearly $515,000 worth at about $25 per share. We have an opportunity to buy cheaper than that right now.
Risks
Investors should note the relatively high debt level of HBI. This creates a risk should interests rates rise or the credit situation change. Anyone assessing this investment should fully understand the situation and make decisions accordingly.
Summary
Hanesbrands is a company with a powerful portfolio of brands which should continue to increase efficiencies and synergies over the next three to five years. Earnings should rise commensurately, and a return to more normalized PE levels suggests significant upside from current prices.
Disclosure: I hold no position and do not plan to initiate any position within 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
