Special Situation Investing

Tuesday, November 07, 2006

HanesBrands Inc. (HBI) - A Further Review

Apparel manufacturer HanesBrand (HBI) released earnings last week, AP writeup here. I have been watching the company from the sidelines since Sara Lee announced that they will be spinning it off. I did a bit of analysis on the company as part of my never-ending quest for a reasonably priced investment. Here is a summary of some of the key points:

Earnings came in at .52 / share, down from .86 / share in the year prior. Earnings in the most recent quarter were impacted by the spinoff from Sara Lee & restructuring charges. Excluding the charges and factoring in taxes, I estimate that earnings would have been closer to .72/.73 per share. Restructuring charges are expected to be $250 million over the next 3 years.

Revenue decreased by approximately 2%. The company attributes this to the exiting of low-margin businesses and reduced sales of sheer hosiery.

The company now has a huge debt obligation of 2.5 billion against a market cap of 2.16 billion. If you exclude goodwill & intangibles the company has negative book value. The loan was only serviced for 3.5 weeks of the last quarter due to the timing of the spinoff. Going forward, of course, the loan will have to be serviced for all of the quarter. Annual debt payments are going to run ~$260 million, or ~$65 million per quarter.

The company is forecasting sales next year of ~$4.5 billion and operating margins of 9.5%. This should result in operating income of ~$425 million. The debt financing would reduce that to ~$165 million. Assuming restructuring charges are split evenly (they won't be but it will average out over the full 3 years) and that the company forecast them correctly, income would be further reduced to $80 million. Taxes will cut that down to about $55 million.

Another way of looking at it is just to ignore the restructuring costs. This would give you net income of ~$110 million. Against a market cap of $2.1 Billion, this still isn't that attractive.

The one bright spot, is that Hanes Brand is still not attracting much analyst coverage. From the article:

Due to its new independence after the spinoff, Hanesbrands is only followed by one analyst, so no accurate Wall Street estimates are available. Credit Suisse initiated coverage of the company Sept. 6 with an initial rating of "outperform."

My final conclusion? HBI is a well-run company with decent products. They should certainly be able to handle their debt payments and even slowly trim it down. However, for the foreseeable future, it is not particularly cheap. Relative to the valuations on many other stocks it seems more reasonable, so if I just had to put money into the market I would probably put a little into HBI. However, fact is, I don't have to buy anything if I don't want to. For now I will remain on the sidelines.

I wrote another article on the Hanes Brand spinoff, here.


I have no position in Hanes Brand or Sara Lee.


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