Hanesbrands: Two Catalysts Provide Investors with Consistent Upside

Hanesbrands (NYSE: HBI  ) has significant potential upside moving forward, even after an 84% advance over the past year. The market is still mispricing the potential from Hanesbrands' acquisition of Maidenform Brands (NYSE: MFB  ) , as well as the company's "Innovate-to-Elevate" platform.

Maidenform Brands provides major upside
In July, Hanesbrands announced that it was buying underwear maker Maidenform Brands for close to $550 million . Hanesbrands already has Playtex, Bali, Wonderbra, and Hanes in the underwear segment, so the Maidenform acquisition seems a natural fit. Since the news, the stock has risen about 20% in value. The market is still not correctly valuing this deal, so far.

Hanesbrands expects that in three years the buyout could provide around $0.60 in earnings per share . In 2012, Maidenform produced nearly $34 million in net income, which converts to $0.33 in EPS . The company expects, therefore, to see 100% growth in earnings over the next three years. Hanesbrands will be able to grow earnings as it expands Maidenform's revenue and improves its margins through its larger global supply chain. Furthermore, Hanesbrands can expand Maidenform's exposure to foreign markets. Maiden only produced 10% of its sales from markets outside of the US in 2012 .

Looking at 2016, Hanesbrands should see an additional $0.60 in earnings per share added to its business. Even if the company saw zero earnings growth, that would increase its EPS from a trailing $3.59 to $4.19. Taking the current price of $61 and dividing by 4.19 produces a future estimated P/E of 14.6. This is an extreme discount to the apparel manufacturing industry's average P/E, which is over 22. In addition, this projection includes no growth in the current Hanesbrands earnings. There is strong potential in the company's activewear developments that complements the Maidenform catalyst.

Innovate to Elevate means consistency and growth
What more are investors looking for than consistency and growth in their portfolios?

Innovate-to-Elevate provides those two items for investors. The project sticks with what makes Hanesbrands strong – underwear, undershirts, socks, and hosiery. At the same time, the company is innovating these products and focusing on its supply chain to improve profitability. The company sums it up as:

Expand our margins by leveraging our strong brands, innovation platforms and our global supply chain. And we are seeing it work across all of our innovation platforms: Smart Sizes; TAGLESS; ComfortBlend and now, X-TEMP. And these platforms are not only benefiting our financial performance, they are also helping our retail partners, as our innovative products drive higher consumer demand, higher average unit selling prices and higher productivity levels.

The strategy has had the following results:

1. Innovation – the company has developed Hanes Tagless, ComfortBlend underwear and undershirts, and Smart Sizes for bras for women. 

2. Supply chain improvements – offshoring production, reducing energy/water consumption by 20-30%, and improving the linkage between front end and supply chain. 

3. Operating margin has improved from 7% in 2009 to 13% over the last twelve months .

The company believes it can maintain a 12%-14% operating margin each year which is big news for investors. The company's focus on innovating on its brand name with new features while also focusing its on supply chain is a simple approach but a winning one. The company is not trying to guess fashion trends, but trying to improve already dominant brand names like Hanes, Champion, and Playtex.

With Hanesbrands, the investor gets a company that understands how to create growth. It continues to build solid business with its brand names, and it also gets a driver of earnings expansion as it continues to focus on its supply chain and cost cutting. What that means for investors is that they can expect more growth of the company's main lines as well as further margin expansion.

So how much upside is there?
As already discussed with Maidenform, the company is cheap with the amount of upside the acquisition provides. Even if the company can see growth around 3% (worldwide GDP) per year of its current business with operating margin expansion to 14% and net margin growth to just 9% (currently 9%), there is major opportunity here. On top of the $0.60 EPS addition from Maidenform, by 2016 there should be an additional $1.40 EPS for Hanesbrands. How did I figure that out?

If revenue grows at 3% per year through 2016, revenue should be at $4.95 billion by 2016. With a net margin at 9%, net earnings would be $440 million. With 110 million shares outstanding, EPS should be at $4.40 (an addition of $0.80). Add in the $0.60 from Maidenform and this is EPS of $5.00. That means the future P/E for 2016 is 12.2, an extreme discount to the industry average. Even to maintain the current P/E of 16.8, the price of the stock needs to grow nearly 40% over the next three years, providing investors with solid, consistent growth.

Takeaway 
Overall, Hanesbrands may be a simple company that owns market share in a number of key consistent consumer goods. The company focuses on innovating by improving these goods rather than jumping into trends, and it continues to focus on supply chain improvements to provide earnings expansion. The stock is an investor's dream, and I expect more upside.

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