Hanesbrands: A good fit

This turnaround in the apparel sector has the added kick of takeover appeal.

By TheStockAdvisors Apr 19, 2013 6:23PM
File photo of Hanes socks on display at a store in Charlotte, N.C. (© Chuck Burton/AP)By Chuck Carlson, DRIP Investor

One attractive mid-cap stock is Hanesbrands (HBI). This apparel company, with a market cap of $4 billion, has nice operating momentum, having beaten earnings estimates in each of the last four quarters.

Hanesbrands was saddled with a lot of debt when it was spun off from Sara Lee in 2006, but the firm has done a good job of reducing its debt load in recent years. Long-term debt at the end of 2012 was $1.3 billion, down from almost $2.5 billion in 2006.

The continued de-leveraging of the balance sheet provides a nice kicker to profitability as interest expense is reduced. Also, a lower debt load should improve the firm’s ability to pay dividends.

Hanesbrands does not yet pay a dividend, but I wouldn’t be surprised to see the firm initiate a dividend within the next 18 months.

For 2013, the company expects net sales of roughly $4.6 billion, earnings per share of $3.25 to $3.40, free cash flow of $350 million to $450 million and further debt reduction of $250 million. The consensus analysts’ earnings estimate for 2013 is $3.35, a nearly 28% increase from 2012.

The stock’s recent strength — the shares are trading around their all-time high — reflects the strong profit growth expectations. The share strength also probably reflects the firm’s takeover appeal. The good news is that Hanesbrands is worth owning regardless of its takeover appeal.

The shares are not cheap, however. For long-term investors, the current price represents a reasonable entry point, and pullbacks to the mid-$30s would offer a price level for more aggressive purchases.

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