Shares of Hanesbrands (HBI -1.76%), a manufacturer of basic apparel and activewear, were hit hard by the sell-off in stocks last December. Pessimism had been building for months after an exclusive deal with Target was killed by the retailer. That bad news coupled with panicked markets led to a steep decline for the beaten-down stock.

The recovery has been just as swift as the fall. Since bottoming out on Dec. 24, Hanesbrands stock has gained about 30%. Most of December's losses have been erased, and investors who took advantage of the temporary swoon have enjoyed market-beating returns.

Even after the 30% rally, the stock still has a lot more room to run. Hanesbrands is a very cheap stock, with a valuation that doesn't reflect the quality of the company. There are some challenges, but not enough to justify the market's pessimism.

Check out the latest Hanesbrands earnings call transcript.  

The Hanes logo.

Image source: Hanesbrands.

Trading for peanuts

Hanesbrands expects to produce adjusted earnings per share between $1.69 and $1.73 in 2018. That guidance is lower than it would be if not for the bankruptcy of Sears Holdings and a strong U.S. dollar. The company reports its fourth-quarter results on Feb. 7, so investors won't have to wait long to see if it can hit that target.

At the current stock price around $15 per share, the price-to-earnings ratio at the midpoint of that guidance range is a bit below nine. And that's after a 30% rally. At its low on Dec. 24, the stock traded for less than seven times earnings.

Hanesbrands is a highly profitable company, albeit one with a few problems. Through the first nine months of 2018, Hanesbrands posted an operating margin of 12.4%. That's down a bit year over year, but still a solid result.

Hanesbrands core underwear business has been declining, but growth in activewear and international sales have been picking up the slack. The company's Champion brand of activewear has been on fire. Champion sales soared 30% year over year in the third quarter, and they grew by 40% excluding the mass channel. The Target deal that Hanesbrands will lose in 2020 is for an exclusive line of Champion products, but the company still expects Champion to reach $2 billion of annual sales by 2022.

On top of trading for a single-digit multiple of earnings, Hanesbrands offers a sustainable 4% dividend that has room to grow. The $0.15 quarterly per-share dividend eats up just 35% of the company's annual adjusted earnings per share, leaving a big margin of safety for dividend investors.

Earnings on tap

Target reported strong sales growth over the holidays, and Walmart is expected to have had a solid holiday quarter as well. Those two retailers are Hanesbrands' largest customers, accounting for more than 30% of total sales in 2017. On the flip side, department stores like J. C. Penney had a miserable holiday season, with comparable sales tumbling. How all of this impacts Hanesbrands results will become clear when the company reports its own fourth-quarter numbers on Thursday.

Analysts aren't expecting much from Hanesbrands in 2019, with the average estimate calling for minimal sales growth and a small boost to per-share earnings. But any earnings growth at all is enough to justify a higher valuation. Decent 2019 guidance may be enough to propel the stock even higher.

Hanesbrands is not an exciting stock or a fast-growing company. But it's a great deal for both value and dividend investors.