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As geopolitical concerns weigh on the Central American supply chain, Gildan Activewear Inc (USA) (NYSE:GIL) is suffering from circumstances beyond its control, according to Bank of America Merrill Lynch.
The Rating
Analyst Heather Balsky downgraded Gildan from Buy to Underperform and cut the price target from $34 to $26.
The Thesis
Gildan operates three of its 13 sewing facilities in Nicaragua, which is enduring labor strikes, road closures, violence and political turmoil, Balsky said in the Tuesday downgrade note. (See the analyst's track record here.)
While the concentrated unrest isn’t seen to stunt the firm’s long-term growth strategy, it could weigh on immediate valuation, the analyst said.
“We expect GIL to work quickly to mitigate supply chain challenges, but these adjustments can take time, hurt efficiency and result in additional costs."
BofA expects the disruption to drive a 7-percent increase in labor and transportation costs as Gildan shifts sewing to other sites and outsources projects to contractors. At the same time, delivery delays could pressure sales and diminished capacity could prevent Gildan from pursuing incremental demand, Balsky said.
The variables are likely to restrict fourth-quarter margins and squeeze Gildan's 2018 and 2019 bottom lines by 4 percent, the analyst said.
Gildan continues to recover from the 2017 Honduran earthquakes, which pushed orders from the first half of 2018 to the second, according to BofA. Similar inventory constraints and manufacturing and transportation inefficiencies were seen after Haiti’s 2010 earthquake, which led to a $7-million cost increase and forfeited sales.
Price Action
Gildan shares were trading down more than 5 percent to $26.75 at the time of publication Tuesday.
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Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.
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