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By Bridget Weishaar | 07-25-2016 05:00 PM

Hanesbrands Is Our Top Pick in Apparel

Trading at a 30% discount to our fair value estimate, narrow-moat Hanesbrands is being unjustly punished.

Bridget Weishaar: Hanesbrands is currently our top idea in the apparel space. The stock is trading at a 30% discount to our fair value estimate. And it's really traded down along with the rest of the apparel coverage; however, we feel that this is unjustified.

First of all, Hanes is primarily in a replenishment category. So, fit and comfort trump demand on price and therefore, it should hold up better than other apparel stock demand. Secondly, it's really a margin story. So, if you look at how it generates its growth, it's primarily through a mix of acquisitions and cost advantages. On cost advantages, it generates about a 15% to 20% cost savings by internalizing manufacturing. So, when it goes out and makes acquisitions, it can generate synergies by rolling them onto this platform. Over the last couple of years, it's made $120 million in acquisitions, and it's generated $170 million in operating income synergies off of those. Third, we think that there are numerous near-term catalysts that could propel growth. These include lower cotton costs, the launch of a new innovative product that should carry pricing power, and the roll out of synergies on prior acquisitions.

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