Given the multitude of near-term overhangs in the branded apparel segment, multiples are likely to be under pressure, creating investing opportunities in companies with stronger long-term positioning, Brean Capital’s Eric Tracy said in a report.
Tracy reiterated Buy ratings on Hanesbrands Inc. HBI and PVH Corp PVH, while reducing the price targets from $35 to $32 and from $124 to $120.
Near-Term Overhangs
Tracy mentioned the near-term overhangs as:
- Seasonality, including a lumpy start to winter.
- Cyclicality, including the athletic cycle maturing.
- Structural, including domestic retail rationalization continuing to impact brands.
- Macro and political, including border tax and trade implications.
“[W]e maintain a cautious stance more broadly for the branded apparel and footwear industry as we enter 2017,” the analyst commented. He added, however, that the share price retrenchment for the group had “begun to bake in many of the risks, creating opportunities in select names once we get through de-risking.”
Strong Fundamental Stories
Non-operational overhangs had overshadowed strong fundamental stories, Tracy stated, naming Hanesbrands and PVH as stocks that had not rallied on President-elect Donald Trump’s victory. In fact, these shares had declined, with Hanesbrands down more than 14 percent and PVH down 18 percent from their post-quarter highs.
While the proposed changes to tax and trade policy as well as continued currency headwinds need to be monitored, the current levels seemed baked into the share price. The analyst noted that both companies had visible EPS levers. While Hanesbrands had strong free cash flows and acquisition synergies, PVH had sustained Calvin Klein and Tommy Hilfiger license acquisition opportunity.
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