Hanes: Undervalued Underwear

09/22/2015 7:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

One of my favorite low-risk stocks is a mid-cap company that sells one of the world's most important consumer goods—underwear—asserts Tyler Laundon, editor of Daily Profit.

HanesBrands (HBI) is a 114 year-old company; this is a stock that you put in your drawer and leave there.

Like the socks, T-shirts, undergarments, sweatshirts, and other soft-goods items that Hanes sells, the stock has a place in every investor's portfolio.

The $12.2 billion market cap company was spun-out of Sara Lee in 2006. Since that time the stock is up over 400%.

Hanes initiated a dividend payment in 2013; this is now a true growth and income stock, offering a bit of everything to investors of all stripes.

The primary source of the company's long-term growth potential is simple: brand power. And Hanes has them, from Champion and Playtex to L'eggs, Wonderbra, and Maidenform.

Hanes is easily the company's most recognized brand. It holds the No. 1 market position in the US in every category that it competes in.

Second in line is the firm’s Champion brand, which has persisted for over 90 years in athletic apparel.

Brand awareness not only keeps customers coming back, it also means they pay less attention to the cost of their purchases. In fact, research indicates that over a third of buyers don't know how much they paid for their own underwear.

The vast majority of sales (85% in 2014) come from the US, where Hanes estimates that eight out of ten households have some variety of Hanes' products.

But international (15% in 2014) is a growing part of the business, having expanded sales by over 50% last year.

Over the last two years it has made two acquisitions that have added significant revenue and profit growth within a short period of time.

The first was Maidenform Brands, purchased in October 2013. In 2014, it acquired DBApparel—France's biggest mass-maker of intimate apparel—with well-known European brands Playtex and Wonderbra.

Most recently, HanesBrands added Knights Apparel, which makes licensed collegiate sports apparel and has exclusive arrangements with the top 50 selling schools.

I view HanesBrands as a relatively conservative growth stock that investors can start building a long-term position in.

A reasonable 12-month price target is somewhere in the $37 to $40 range, if we take management at its word that second-quarter inventory issues will be overcome relatively soon.

There is upside potential over the long-term—with more acquisitions likely to come—and I expect the dividend will grow too.

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