The Selloff In Hanesbrands Shares Is 'Overdone'; D.A. Davidson Upgrades To Buy

Following the 21 percent year-to-date decline in Hanesbrands Inc. HBI shares as compared to the 7 percent rise in the S&P 500, D.A. Davidson’s Andrew Burns believes the weakness has created a compelling entry point into the stock.

Burns upgraded the rating on the company from Neutral to Buy, with a price target of $29.

Selloff Overdone

Following the U.S. presidential election, the S&P 500 appreciated 5 percent, as compared to a 5 percent decline in Hanesbrands shares. However, given the company’s 9 percent year-on-year earnings growth year-to-date, along with expectations of continued EPS growth in 2017, the stock valuation appears compelling.

“We expect the basic apparel top line environment will remain sluggish and see year-end retailer de-stocking as a potential risk to quarterly earnings. That said, we believe this is well incorporated into current sentiment,” the analyst went on to say.

Opportunities Ahead

Beyond Q4, Burns believes the competitive environment for the basic apparel segment remains benign, while cotton costs are likely to be a “manageable headwind” in 2017.

“Importantly, HBI's brand strength and cash generation remain intact,” the analyst stated, while adding, “Looking to 2017, cash deployment (acquisitions, debt pay down, share buybacks) should be a positive catalyst.”

While import tax has been a concern for the apparel industry, Hanesbrands’ supply chain position puts the company in an advantageous position.

“HBI's supply chain benefits including 1) global diversification that mitigates risk from any one region, and 2) a significant presence within CAFTA, which is a bright spot in trade agreements,” Burns explained.