'Unmentionables' Are Worth a Look-See
04/12/2013 7:00 am EST
You may not want to talk about their products in mixed company, but earnings acceleration and reduced debt make this company worth a look, writes Charles Carlson of DRIP Investor.
When I first started publishing this newsletter a little over 20 years ago, there were only a handful of companies that allowed any investor to buy the first share and every share of stock directly from the company.
Today, there are more than 300 US companies (and a similar number of foreign companies) whose shares trade on US stock exchanges and that allow investors to buy even initial shares directly. The growth of direct-purchase plans has increased the opportunity for DRIP investors to buy stocks of all sizes, including mid-cap stocks.
Like the sometimes forgotten middle child of the family, mid-cap stocks—stocks with market capitalizations between $2.5 billion and $10 billion—may not receive much attention from investors. Yet mid-cap stocks as a group have outperformed large and small stocks so far this year, over the last 12 months, over the last five years, and over the last ten years.
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. The shares are not cheap—the stock trades for around 13 times 2013 earnings estimates—but offer an excellent fit for DRIP portfolios.
Spun off from Sara Lee in 2006, Hanesbrands manufactures a variety of apparel products, primarily undergarments and related wear. Brands include Hanes, Champion, Playtex, Bali, L’eggs, and Wonderbra.
According to the company, Hanesbrands can be found in eight out of ten American households. The company holds either No. 1 or 2 market share positions in most of its product categories.
Hanesbrands was saddled with a lot of debt when it was spun off from Sara Lee, 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 deleveraging 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 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.
Given low interest rates and an improved stock market, the climate is improving for merger activity, and the consumer-products sector should see its share. The good news is that Hanesbrands is worth owning regardless of its takeover appeal.
Given its recent rally, the stock is vulnerable to a correction in the near term. 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.
Please note that Hanesbrands offers a direct-purchase plan. Minimum initial investment is $250.