Editor's Note: Our retail analyst team added Gildan Activewear (GIL) to its Best Ideas LONG list on July 9th. It recommended shorting Hanesbrands (HBI) the same day. Below is the original note they sent out. For information on how you can access our institutional research email email@example.com.
GIL = New Best Idea Long. Monster Competitive Moat. Asymmetric Upside. 2-Year Double.
GIL has perhaps the best competitive moat of any company in the retail supply chain. It produces apparel at a lower cost than any of the 20,000 apparel companies in the world. Trying to compete with GIL would be like the equivalent of waking up one day and deciding to compete against Nike selling basketball shoes (where it has 90% market share). The stock is down 15% since the end of January, and yet fundamentals are getting better on the margin. It has recently invested in new capacity that has temporarily lowered RNOA, and is beginning to backfill demand in both its screen printing business (where it has 70% share of t-shirts, for example), as well as in its branded business in US mass channels (displacing HBI along the way). That accelerates growth, lifts margins, and leverages fixed assets. Within 2 years, we think GIL can add an incremental $800mm in revenue (10% CAGR) and realize $3 in EPS power (current base = $1.90). Base case multiple is 15x, or a $45 stock vs today at $27.50. But realistically, if and when our numbers prove right, we’ll be looking at a name that is growing earnings at a 25% CAGR, which supports a multiple starting with a 2. There’s your double over an 18-24 month period with solid downside support.
Shorting More HBI on the Quarter. Roadmap to a Meaningful 2H and 2019 Guide Down.
We’re going back to the wood with our HBI short. The stock has rallied by 35% since the analyst day in mid-May, and absolutely nothing has changed fundamentally. The second quarter looks good. Nothing changed there – this simply was never the quarter for the story to break. We think that in 2H (which started already) is when HBI faces another downward leg to both earnings and cash flow. We’re 20% below the Street this year on Cash Flow, and 35% for 2019. If our numbers are right, we’re likely looking at HBI breaking back through the previous recent low of $16.80, and being revalued on lower numbers in the low-teens. A 5x EBITDA multiple on our 2020 estimates leaves the company with no equity value left. There’s terminal value here, but it simply accrues to bondholders.
Thursday, July 19th at 10:00am EDT
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