Hanesbrands a Bargain Despite Some Near-Term Issues

We maintain our fair value estimate of $27 on narrow-moat

Investors may be focused on Hanesbrands’ short-term results and ignoring the potential for margin improvement. We estimate its overall adjusted operating margins will gradually improve from 13.8% in 2018 to 16.4% in 2027 due to profit gains in the activewear and international segments. We forecast both segments can reach 18.0% operating margins in 2024 as the firm integrates recent acquisitions and implements growth plans. Further, we expect a reduction in SG&A as a percentage of sales of approximately 200 basis points over the next few years from “Project Booster,” Hanesbrands’ companywide cost-cutting program.

Hanesbrands is in the process of paying down debt, but we believe its strong free cash flow will allow significant stock repurchase activity in the medium term. We forecast free cash flow generation of more than $3.5 billion over the next four years. We expect it will maintain a dividend payout ratio of about 30% and resume repurchase activity by 2020 after reducing its debt-to-EBITDA below three.

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