Calendar 2018 was a rough year for apparel giant Hanesbrands (NYSE:HBI). Innerwear sales — long considered this company’s bread and butter — faltered in the face of rising competition. Operating margins dropped as growth trends slowed. Net profit margins fell by even more under the weight of a growing debt load and rate hikes, which ballooned interest expenses. Profits dropped. HBI stock fell.
All of those headwinds culminated with Hanesbrands stock falling to $11 by Christmas, the lowest in five years. For context, HBI was a $20 stock at the beginning of 2018.
Since dropping to $11, though, HBI stock has staged a huge turnaround. Thanks mostly to improving macroeconomic sentiment and a strong double-beat fourth-quarter earnings report, Hanesbrands stock has almost doubled in a little more than two months, and now trades just shy of $20.
This turnaround in HBI stock has legs. Hanesbrands is a stable company with a big yield, and improving trends on the revenue, margin, and balance sheet fronts. As those trends continue to make progress in 2019, the shares will continue to rally. Prices above $20, and closer to $25, are within reach this year. Buyers here won’t be disappointed.
The Bad Year Is Over
Calendar 2018 was a bad year for Hanesbrands. Long story short, innerware — the company’s healthiest business segment — started to show signs of weakness. That freaked out investors, who were already looking at falling margins and ballooning interest expenses. Net result? Profits dropped and investors fled.
Surprisingly strong Q4 numbers last week underscore that calendar 2019 will be way different for many reasons. Why?
- Q4 organic sales growth was 6%, the best rate in eight years.
- U.S. innerwear sales were flat year-over-year in the quarter, versus a 7% drop in the third quarter.
- Direct sales growth accelerated to 23% in the fourth quarter, versus 15% growth in the third.
- Activewear sales rose by 13%, led by 50% growth at Champion. Q3 activewear sales rose 7%.
- International sales increased 12%, versus 11% growth in the third quarter.
- Operating margins improved by 40 basis points year-over-year, after declining sharply throughout the first half 2018.
- The guide implied continued positive revenue growth and slight margin expansion next year.
Overall, Q4 was really good. It underscored that the worst for the innerwear segment is over, while the activewear and international segments are only getting hotter. Meanwhile, margins are finally starting to improve again, and interest expense is stabilizing as rates level off.
That’s a bunch of good news and explains why HBI stock has rallied in such a big way since the holidays.
Fundamentals Support Further Upside
The good thing about HBI stock is that it was so beaten up in late 2018, that the stock’s near 50% year-to-date rally could extend even further.
Consider this. Even after the huge early 2019 rally, HBI stock still has a 3%-plus dividend yield. The forward P/E multiple is still just 10x, while the forward price-to-sales multiple is below 1x. The stock is 20% off its 52-week highs, and down 40% from its three-year peak.
In other words, HBI stock is still really beaten up. Those valuation metrics would make sense if Hanesbrands found itself drowning in debt, running net losses, and unable to grow revenues. But, that isn’t where the apparel maker finds itself today. Instead, the company is reducing leverage at an impressive rate. It’s generated lots of profits, and those profits are expected to grow. Meanwhile, organic sales growth is running at multi-year high levels.
In the big picture, HBI stock is still far too cheap, considering this is a financially healthy company with stabilizing operations. As such, this rally won’t fizz out any time soon; It should persist for the foreseeable future.
Bottom Line on HBI Stock
HBI stock got way too cheap at the end of last year. Now, the shares are recovering following a strong double-beat Q4 earnings report, implying that the worst is over. This recovery should persist for most of 2019. The underlying trends are improving, and the valuation remains anemic. That combination should keep the early 2019 rally in Hanesbrands stock alive for a little while longer.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.