Is Hanesbrands Stock Stretched to the Limit?

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Hanesbrands (NYSE: HBI), the underwear company and owner of brands like Hanes, Playtex, and Champion, rallied during the summer months. Though the company is a producer of basic apparel, there is a lot going on that makes this stock worth a look.

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2017 in review

Hanesbrand sales for the first half of 2017 were $3.03 billion, 12.4% higher than last year. Year-to-date, earnings per share are up 20% to $0.65. This strong performance can be attributed to a number of acquisitions made last year, including the independent trademark owner of the Champion brand in Europe. That move unifies Champion under the Hanesbrand umbrella. Another big move was the purchase of the parent company of Australia's largest underwear maker, Pacific Brands Limited.

Online revenue also increased 25% in the second quarter, making up 9% of total sales, compared with 8% in 2016. Sales of Champion active wear were up 7% on a comparable basis when excluding the acquisition. Some areas have struggled, however, with basic innerwear declining by low single-digits this year and overall active wear up only 1% in the last quarter.

What's next for all things undergarments

Though Hanesbrands' business has struggled a bit excluding the buyouts from last year, things are trending in the right direction. The company sees organic growth of flat to up 2% by year end. Total sales are expected of $6.45 billion to $6.55 billion and earnings-per-share of $1.70 to $1.82. That implies 8% and 26% growth for sales and earnings per share at the midpoints of guidance, respectively.

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After its bout of shopping in 2016, Hanesbrands began executing on a new program to cut costs and improve sales growth called Project Booster. When launched at the beginning of the year, management said the goal was to save $150 million annually by 2019, with $50 million of those savings to be reinvested back into the business.

That investment will focus on the company's digital channel and growth of the Champion active wear brand. In line with those efforts, the company anticipates scaling back its physical stores, shifting traffic online instead. So far so good, as management said online sales should continue to grow by double digits across all brands.

Project Booster is expected to have no effect on the bottom line for full-year 2017, but savings from the initiative are expected to be realized starting in the next two quarters.

To buy or not to buy

Hanesbrands is a consumer staple, a type of business that sells basic goods and is usually characterized by slow but reliable growth. As such, investors looking for stability and income might be drawn to the stock. After all, Hanesbrands currently pays a 2.5% dividend and has tripled the payout since it was initiated back in 2013. However, that doesn't mean investors looking for a little extra growth should pass this one by.

The company's trailing 12 month price-to-earnings currently sits at 15.5, but that number drops to 11.8 when using forward profit estimates -- remember that management thinks it can deliver 25% profit growth for full-year 2017.

I think more telling, though, is the price-to-free cash flow metric. Free cash flow is money left over after all operational expenses are paid and can be a more relevant measure of profitability than net income. Using free cash flow from the last 12 months, the above metric comes out to an even lower figure of 12.8.

If Project Booster starts to yield results, free cash flow should climb even higher, and that extra cash could help support further dividend increases for shareholders or fund additional acquisitions, something that management said it is still watching closely. Either way, Hanesbrands remains a buy at current prices, even after the rally this summer.

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Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.