A Deep Drive into Hanes Brands (HBI)
So I’ve been on a quest.
A quest to find some VALUE in this market!
And I think I may be onto something, Hanes Brands.
Now you might be wondering why Hanes is the stock of my picking. So there are a few reasons for Hanes:
I see some value in the stock.
Hanes is boring. I mean let’s be real, the first thing you think of is underwear, socks, and shirts. This company is not setting the investing world on fire, but that’s the point. I’m looking for companies off the public radar. The less hype, the better.
Not to sound like a doomer, but I think 2022 is going to be rough. And because of this, I want defensive companies that are selling for a reasonable price. Typically to me, this screams consumer staples- something people will always need no matter the economic condition.
I want companies with a tangible products. Sorry Rivian, but I need to see products, not ideas.
So now, let’s dive.
The Evaluation
So in my last post, I discussed how I read Buffettology. Well, I’ve been itching to use its evaluation methods on a company, so that is what I will be using today, and I will answer the questions this methodology asks honestly.
Qualitative Analysis
Does the company have an identifiable consumer monopoly or brand name products, or does it produce a commodity-type product?
Definitely consumer monopoly. I would be hard-pressed to find a person that does not know this brand. Not to mention they are in every Walmart, Target, you get it, basically every major retailer.
Is the company conservatively financed?
Hanes does not look conservatively financed. A look at its 1/2/2021 financials indicates a debt of $6,905 of debt compared to $7,719 of assets, additionally a debt to equity ratio of >5. Basically, Hanes is looking pretty levered to me.
However, I do want to point out that after a review of the companies 1/2/2021 10-K, it appears Hanes has plenty of time to pay off its long-term debt.
So to me, the only thing to be concerned about is the Short term debt due.
So pulling from the most recent 8-k, I see cash and AR are enough to cover accounts payable ($ to be paid out in the new future), but honestly, it’s by the skin of their teeth. So in total, I say Hanes passes, but this is something to keep watch for in the future.
Are the earnings of the company strong and do they show an upward trend?
Yes!
Does the company allocate capital only to those businesses within its realm of expertise?
As far as I am aware of yes.
Is the company buying back shares?
Yes!
Does the way management spend retained earnings increase shareholder value?
Well, let’s do the math on this one.
From FY12 to FY 20, Hanes had a total retained earnings per share of $28.64. FY 12 had a RE/Share of $2.27 and FY 20 had a RE/Share of $3.03. Therefore we can argue that $28.64 of RE per share over the period produces a return of $0.76 ($3.03-$2.27). Thus giving us a 2.64% rate of return (.76/28.64).
So what does this mean?
Well, there has been a profitable allocation of retained earnings, and during this period, we have seen an increase of HBI’s stock of a little over 150% (Per Google search).
Is the company’s return on equity above average?
From FY 11- FY 20, Hanes Brands has an average ROE of 32%. So how does this stack up?
Well using the research from Aswath Damodaran, an expert in valuation, here are ROE Averages for comparison of Apparel Companies.
So yes, above-average ROE.
Is the company free to raise prices to inflation?
I would think so, but I haven’t religiously followed sock and underwear prices.
Does the company require large capital expenditures to constantly update the plant and equipment?
It appears PPE makes up a small part of Hanes’s assets, so imma say no.
So does Hanes pass?
I think so! Debt is the only questionable attribute, but I will let it slide due to the time Hanes has to still pay off long-term obligations.
Quantitative Evaluation
Now that we know Hanes passes the qualitative test, now let’s test the quantitative.
Rate of return to Bonds
Hanes had an average EPS of $0.71. I used an average as 2020 was an anomaly for Hanes, making them have negative earnings. Divide $0.71 by the interest rate of a 10 year (1.48% on 12/27/2021), and you get a relative price of Hanes stock of $48.81. Today, you can buy a share of Hanes for $16.53, so with an eps of $0.71, this gives you an initial return of 4.32%.
So let me pose you a question, would you rather own a bond with a static return of 1.48%, or a share of Hanes with an initial 4.32% return, and a history of increasing EPS?
ROE Analysis
Now let’s look at Hanes from an ROE standpoint. On 1/2/2021, Hanes had an equity per-share value of $2.31 ($814 Equity/ 353 shares outstanding). If Hanes can maintain its 10 year ROE average of 32%, and retain 68%, with the other % being paid out as a dividend (Current payout ratio 32% via dividend.com). So, Hanes equity should be growing at a rate of 21.51%. So in 10 years’ time, Hane’s equity/share should be $16.18, and with the 32% ROE, Hane’s EPS should be $5.12.
Now let’s look at Hane’s PE ratio over the past 5 years. We have a high, low, and average of 821.15, 5.17, and 45.2 respectively (PE ratios from Macrotrends.com), giving us the following valuations.
Additionally, we can add back 10 years of dividends to this valuation (HBI's current div/share is $0.60 per dividend.com, and I kept this the same for simplicity's sake). Now I’m not going to use the high-value PE to argue Hanes is great, but I think this rough model shows that even at Hanes's lowest PE, we can still see an almost 200% return, or about 20% a year annual, not too shabby.
Per Share Earnings Growth Analysis
Last analysis, then I’ll let you go.
So using the Average EPS from our bond return evaluation of $0.71, we can use this to derive a possible future share price and return.
Looking at Hanes average EPS growth over the past 10 years, it’s 79%. However, Hanes has had a few years of abnormal change (highlighted in yellow). By removing them, we get a more smoothed growth rate of 6.14%. Is this the best way? I’ll let you decide, but I feel comfortable enough with it.
So using the 6% growth rate, I can project the $0.71 EPS out 10 years, giving us the following:
Additionally, I used the more aggressive Seeking Alpha estimates from earlier, just to see what an even larger starting EPS can produce. Again, not too shabby of returns using this methodology.
So what’s my move?
Well, I like Hanes Brands (if you can’t tell).
Looking at many different comparisons, Hanes seems relatively undervalued not just to itself, but also to the sector.
Additionally, Hanes past quarters are showing a recovery from the 2020 loss.
So how do I want to play Hanes?
Well, I like it now, but I would like it Even Cheaper. So my plans are to sell cash-secured put contracts and collect some premium. Once I get assigned shares (which will happen eventually), I don’t mind holding the shares of Hanes. This company is a consumer staple, selling at a cheap valuation. They have a nice dividend yield and based on my analysis, there looks like an upside.
To me, this is the perfect company to put my money where my mouth is in relation to my beliefs about the future of this market, where consumer staples will be America’s saviors, and high flying tech stocks will burn out.
-A Little Cardinal
See my spreadsheet at the following link
https://docs.google.com/spreadsheets/d/1BgfEzdFNc4r8x-94Ty-1IoWCK3ggwRA2/edit?usp=sharing&ouid=102354405955599963256&rtpof=true&sd=true