One of the sources of a lot of conversation among talking heads and market analysts in general lies around the “reopening” concept. This theme has been pretty constant for most of the year, even as COVID variants – omicron is just the latest – have extended the health crisis well into 2022, with some experts suggesting it could be 2024 before the virus is truly under control. That doesn’t delay the reopening idea – the U.S. hasn’t reimposed restrictions, either during the worst of the delta wave during the summer or with the emergence of omicron now. It does suggest, however that the ever-anticipated “return to normal” is really a shift to a normal that simply reflects the conditions of our day, with all of the challenges and opportunities that go with it.
Market enthusiasm and economic growth driven around the reopening of business and social activity has generally been a net positive for the Consumer Discretionary sector. The sector has shown quite a bit of resilience over the past couple of years, driven by a massive shift to e-commerce services and solutions. Among the pandemic-driven shifts that worked in the favor of a lot of different industries in the sector, including stocks in the Textiles, Apparel & Luxury Goods industry has been an increased focus on personal health and wellness. That is an industry that includes well-known players like Under Armour (UA), Nike (NKE), Hanesbrands Inc (HBI) and today’s highlight, Gildan Activewear (GIL). GIL doesn’t have the same cachet that comes from immediate name recognition, but is a very interesting stock because of its focus on private label apparel.
An increasing number of retailers have been shifting the products they offer, increasing shelf and floor space in favor of brands offered only in their own stores. One of GIL’s strategic goals is on partnering with traditional retailers to manufacture those private label goods. It’s a trend that is expected to continue to grow, since private labels offer higher margins in the always-competitive retailing industry where margins are consistently thin and becoming even narrower – and where traditional brands like NKE, UA and more have been actively working to develop their own direct-to-consumer systems to bypass the traditional, more costly retail arrangement. Private labeling provides a way for retailers to compete, which is why GIL occupies such an interesting niche in its market. It is also a stock that has more than doubled in price since the last quarter of 2020, but more recently appears to be consolidating round its latest 52-week high. A push above that high would be interesting for growth-oriented investors, but what kind of opportunity does this stock offer for longer-term investors – especially for contrarian-minded value hunters? Let’s find out.
Fundamental and Value Profile
Gildan Activewear Inc. is a manufacturer and marketer of branded basic family apparel, including T-shirts, fleece, sport shirts, underwear, socks, hosiery and shapewear. The Company operates through two segments: Printwear and Branded Apparel. The Printwear segment designs, manufactures, sources, markets, and distributes undecorated activewear products. The Branded Apparel segment designs, manufactures, sources, markets, and distributes branded family apparel, which includes athletic, casual and dress socks, underwear, activewear, sheer hosiery, legwear, and shapewear products, which are sold to retailers in the United States and Canada. The Company sells its products under various brands, including the Gildan, Gold Toe, Anvil, Comfort Colors, American Apparel, Alstyle, Secret, Silks, Kushyfoot, Secret Silky, Therapy Plus, Peds, and MediPeds brands. The Company distributes its products in printwear markets in the United States, Canada, Mexico, Europe, Asia-Pacific and Latin America. GIL’s current market cap is $8.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 166.67% (not a typo), while revenues were more than 33% higher. In the last quarter, earnings increased by 17.65%, while sales increased by 7.28%. GIL operates with a margin profile that suffered during the early part of the pandemic – which isn’t a big surprise given the conditions – but has shown significant signs of improvement this year. Over the last twelve months, Net Income as a percentage of Revenues was 17.7%, and increased in the last quarter to nearly 23.5%.
Free Cash Flow: GIL’s free cash flow is $758.42 million, and translates to a useful Free Cash Flow Yield of 9.29%. The current number also marks an improvement over the past year from about $330.5 million and $664 million in the previous quarter.
Dividend Yield: GIL’s dividend is $.616 per share, which translates to an annual yield of about 1.48% at the stock’s current price. Management suspended its dividend last year at the beginning of the pandemic, but reinstated it at the beginning of 2021.
Debt to Equity: GIL has a debt/equity ratio of .35. This is a conservative number that generally implies management takes a conservative approach to leverage. GIL’s balance sheet shows almost $390 million in cash and liquid assets (up from $310.86 million in the last quarter) against about $600 million in long-term debt. GIL’s margin profile indicates operating profits are more than adequate to service their manageable debt load, with healthy, expanding liquidity to provide additional flexibility.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. The “reopening” concept – which to me just means that businesses will continue to figure out ways to adjust to current conditions – also provides a reasonable argument to factor expected growth rates into the equation, and I think that is applicable to GIL’s case. All together, these measurements provide a long-term, fair value target around $54 per share. That means that even with the stock’s increase in price over the last year, it remains nicely undervalued right now, with 30% upside from its current price.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart traces the stock’s price movement over the last year. The red line traces the stock’s upward trend since January of last year to its peak at almost $44 in November; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock pulled back to find a new, current support at around $39 a little before the Christmas break, but has been picking up bullish momentum since then, nearing immediate resistance at around $42 per share. A push above $42 should see the stock test its 52-week high around $44, while a drop below $39 should find next support somewhere around $36.50 per share.
Near-term Keys: If you’re looking for a short-term, bullish trade, there is limited near-term upside in GIL right now; however a push above $42 could be a signal to buy the stock or to work with call options, with an eye on the stock’s recent peak at $44 as a useful exit target, and $46 possible if buying activity accelerates. If the stock pivots off of current resistance at $42 and starts to drop, you could consider shorting the stock or working with put options, with $39 providing a good profit target on a bearish trade, and $36.50 acting as an attractive secondary target if bearish momentum increases. GIL is an interesting stock to pay attention to on a long-term basis, with an interesting value proposition that is worth considering if economic activity remains healthy.