Goldman: Hanesbrands Has 32% Upside

• Hanesbrands Inc. HBI shares have gained 8 percent year-to-date, despite the sharp decline between July 30 and August 3.
• Goldman Sachs’ Taposh Bari upgraded the company from Neutral to Buy, raising the price target from $32 to $40.
• Despite the YTD gain, Bari believes Hanesbrands’ shares have upside owing to the company’s pricing power across its portfolio, its M&A strategy and capital allocation.

Despite only modest growth in U.S. consumption, heightened emerging market risks and decline in product costs, Hanesbrands’ ROIC of 20 percent may rise further. Analyst Taposh Bari believes that the company’s ROIC would be boosted by “pricing power across a portfolio of basic apparel” as well as its “advantaged M&A strategy.”

Bari said that although Hanesbrands’ shares have outperformed year-to-date, there seems to be “an opportunity to buy a best-in-class operator” that appears to be well positioned in the current environment, following the 12 percent decline in shares since March, versus a 6 percent decline in the S&P 500.

The negative organic revenue revisions in the innerwear segment appear to be “transient,” Bari said, adding that the issue will likely be resolved by the end of 2015. He further added that the company had met the 2Q15 EPS expectations, generated 10 percent growth in organic EBIT and maintained its FY15 guidance.

“Looking ahead, the benefits of lower cotton and buybacks should begin in 2H15 and the core drivers of the bull case – margin expansion and M&A – remain in place,” the Goldman Sachs report stated.

The EPS estimates for 2015, 2016 and 2017 have been raised from $1.60 to $1.65, from $1.73 to $1.90 and from $1.89 to $2.10, respectively.

“We believe the added benefits of an under-levered balance sheet, meaningful capital returns (dividend growth and buybacks), proven execution history and developed market exposure warrant HBI’s premium valuation,” Bari wrote.