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From the DividendInvestor news file this week: Please see an analyst update below from Morningstar Research Services for Hanesbrands HBI. Earlier today, George Metrou made several trades for the portfolios: In the Dividend Select portfolio, he exited his position in AmeriGas Partners APU. In the Dividend Select Deferred portfolio, he exited his position in PPL PPL. He also established 2% stakes in Plains GP Holdings LP PAPG in both portfolios -- please see his trade alert for complete details. Best wishes, David Harrell Editor, Morningstar DividendInvestor
News and Research for Dividend Select Portfolio Holdings
A Fair Value Increase for Hanesbrands
by David Swartz | Morningstar Research Services LLC | 06-12-19
We're lifting our fair value estimate for Hanesbrands to $27.50 from $27 on the time value of money and the $0.01 earnings beat in the first quarter of 2019. This estimate implies the following 2019 valuation ratios: an adjusted P/E of 15.6, an EV/adjusted EBITDA of 12.2 and a free cash flow yield of 6.2%. Our fair value estimate assumes long-term annual organic innerwear growth of 1.5% and annual international growth of 2.5%. Long-term growth in innerwear is very low, not much more than population growth. However, outside of the U.S., we believe Hanesbrands will achieve modestly higher sales growth as it expands its points of distribution. Our fair value estimate also assumes annual activewear growth rates of 3% over the next decade. We do not forecast activewear (approximately 37% of global sales) will achieve this growth rate in 2020 due to the loss of the C9 business at Target. Despite this setback, we believe that Hanesbrands’ activewear business has good growth prospects, reflecting expansion plans for the Champion brand and recent acquisitions in the category.
Our fair value estimate assumes innerwear (approximately 63% of global sales) operating margins hold steady at about 24%. Further, we assume gradual increases in operating margins for both activewear and international (about 34% of sales) over the next five years, with both increasing to 18% in 2024 from 15% in 2018. Hanesbrands expects to improve production efficiency as it implements best practices at its newly acquired businesses. Moreover, it plans greater promotion of Champion in Europe and China. Our fair value estimate assumes low inflation in wage and cotton prices, resulting in a gross margin that stabilizes at 40%. We anticipate that Hanesbrands will reach $7 billion in sales and $1 billion in operating profit by 2021. Further, we estimate that Hanesbrands will generate approximately $3 billion in free cash flow to equity between 2019 and 2022. These estimates are slightly lower than those released by the company at its 2018 Investor Day. Our estimates do not include any contributions from acquisitions, given the uncertain timing, but it is likely that Hanesbrands will make a few. At the Investor Day, Hanesbrands estimated that it may add $700 million in annual revenues from acquisitions by 2022 (an increase of approximately 10% from 2018). Hanesbrands may be able to increase operating profit and free cash flow if it closes a few deals.
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