By David Ristau
Gildan Activewear (GIL) is a company with good value, very manageable debt levels, and many different initiatives for growth potential. Our price target analysis forecasts a 14% drop in stock price over the 2013-year. With multiple company acquisitions on the horizon, GIL is using a good part of its resources making investments presently for future returns, but we see these as already mostly priced into the stock at this point and believe upside is lacking for the rest of the year. While our thesis is positive, valuations do not appeal to us at these levels for current growth rates over the next 24 months.
Gildan Activewear has decent value that is slightly below positive rating for us, but the stock is relatively cheap in its price valuations. The stock's future PE is 13.3, and we look for value below 15. We also see positive in Price/FCF and Price/OCF. The company, though, has weak value ratings in Dividend Yield and debt-to-equity ratios.
Price/FCF and Price/OCF measure a company's market price to its level of operating or free cash flow. In general, the higher the ratio, the more expensive the company is considered. With 0.1 for both Price/OCF and Price/FCF, GIL is very affordable as a buyout.
EV/Sales is a solid comparison of the company's market capitalization to annual sales. The ratio allows us to see how much it costs to buy the company's sales. The low EV/Sales ratio shows that it is not expensive to buy out the company, which is very positive for GIL. Again, the company is a key buyout candidate with its fair value.
The company's PEG ratio is important at 1.6, as it shows fairly good value as well. PEG shows a company's value in comparison to its growth capabilities. At 1, the company is very valuable in comparison to growth. We will look at the details of GIL's growth potential later, but this is our first indicator.
Even though GIL has good cash flow, their dividend is not very strong at 0.3. This may be due in part to their debt. All in all, the company has decent value.
Growth is not strong for GIL, as it scored just above negative on our scale. The company has had very limited growth in the past five years, and we do not expect an outstanding amount of growth for the company. Let's look closer at growth prospects for GIL.
Our data shows that GIL is expected to see 11.2% growth in sales revenue this fiscal year. That growth is expected to slow going into the 2014 fiscal year. GIL's 2013 and 2014 EPS growth are both expected to be positive as well. Although these numbers are fairly encouraging, GIL's recent growth history is not encouraging at all. Across the board, the company see negative growth ratios.
Let's see what GIL itself says about its growth prospects and initiatives. In their Q2 report, GIL reports that its expected net sales for 2013 is now projected at about $2.15 billion. For EPS, the company reports full-year adjusted EPS at $2.65-$2.70, a number that is at the high end of its previous projection due to increased supply chain and manufacturing efficiencies to offset the previously projected rising costs of cotton.
In Q3, the company is projecting adjusted net EPS at $0.92-$0.95, compared to Q3 of 2012's adjusted net EPS at $0.66. This increase in EPS YoY reflects significantly lower cotton costs together with assumed higher unit sales volumes and more favorable product-mix for both their Printwear and Branded Apparel sectors. Net sales revenues in Q3 are projected to be approximately $630 million.
Later, in our "Catalyst" section, we will look into initiatives GIL has announced and decide whether their plans match their projected growth.
Profitability is decent for GIL, as they sit at neutral. As we saw in the last section, the company's recent growth history is what is bringing down the rating. Their current ratios like operating margin, asset turnover, and ROA, are positives. Let's see how the company compares to competition.
The company's closest competition is V.F. Corporation (VFC), Columbia Sportswear Company (COLM), and PVH Corp. (PVH). Operating margin for GIL is fairly strong at 13.5%. How does that compare to VFC, COLM, and PVH? The companies have operating margins at 13.8%, 8.4%, and 8.4%, respectively. We can see that GIL is definitely at the leading edge of its competition, only slightly beat out by VFC. When we look at gross margins, the companies have ratios at 47.1%, 42.8%, and 52.8%, respectively. Here, GIL is far behind the competition.
What is holding GIL's gross margin back?
At first it appears that GIL's cost of goods is way too high. For Q2 2013, 71% of net sales are going to cost of goods. This is compared to 82.1% in Q2 of 2014. Although this number has slightly improved, it is still trailing the competition. In their Q2 report, GIL mentioned adjusting its supply chain efficiency in order to offset rising costs of cotton. The company will have to take larger measures to improve their GM.
The company's best margins in this category are Asset Turnover and ROA. These margins measure how profitable a company is in relation to its total assets. These do indicate that despite negative growth the past five years and fairly weak profitability margins, the company is profitable relative to its assets.
Cash Flow/Efficiency is again neutral for GIL. The company shows positive in OCF growth and Cash Conversion Cycle, but is held back by FCF growth, Days Inventory, and Receivable Turnover. The company reports a low dividend at 0.33 equaling an almost nonexistent yield. For investors, they want to know that the dividend is safe. We do not see this as the case for GIL.
First, the company has fair OCF/Sales at 19%, and it has seen over 644% growth in operating cash flow in the last five years. OCF is important to dividends, because it is what is used to pay off dividends. FCF is important to see to believe that dividend hikes can occur. The company is a little stronger in its FCF/Sales ratio at 14.3%, but the company has seen 0% rise in free cash flow in the past five years, which is disconcerting.
Solid cash flow is also helpful to pay off debt levels and improve the business without taking on more debt, which can help improve profitability.
GIL's efficiency ratios are not extremely strong, but we need to take into consideration that apparel manufacturing companies function at a slower rate than companies in other industries.
Let's see how BAGL compares to VFC, COLM, and PVH in days sales outstanding, days inventory, and the cash conversion cycle. VFC sits with 40.3, 92.3, and 102.0, respectively. COLM is at 53.3, 131.1, and 152.8 respectively. For PVH, the company has 36.4, 111.7, and 108.2 respectively. As we can see, GIL has strong days sales outstanding, weak days inventory, and very strong cash conversion cycle compared to the competition. A strong days sales outstanding means GIL is taking a shorter amount of time to collect revenue from its customers than other companies in the industry. A weak days inventory means it takes long for the company to sell and replace its inventory. Cash conversion cycle measures the length of time, in days, that it takes for a company to convert its resource inputs to cash flow. GIL is very strong in this area.
Overall, the company has good cash flow and decent efficiency for the industry.
Financial health is strong for GIL. The company's current ratio at 4.2 is well above the 1.0 threshold we look at for financial health, and the quick ratio at 1.5 is again above the level we look at before we see a major red flag at 0.5. How do these ratios compare to their competition?
VFC has a current ratio at 1.9 and quick ratio at 0.9. COLM has a current ratio at 6.2 and quick ratio at 3.7. Finally, PVH has a current ratio at 2.4 and quick ratio at 1.2. So, we can see that GIL has a strong current ratio at 4.2 but is beat out by COLM at 6.2. The current ratio measures how able a company is to pay off their debts. Anything under 1 means the company would be unable to pay off debt if they had to at the moment. The quick ratio indicates a company's short-term liquidity. The higher the ratio, the better the position of the company. A 1.5 quick ratio is strong but again is beat by COLM.
GIL has a good Debt/Equity level at 0.1. High debt levels versus equity levels can affect the company's ability to generate earnings as a result of high interest payments. GIL has a manageable level of debt as we can see in multiple ratios in this category: Debt/Equity, GP to Current Liabilities, OCF to Current Liabilities, and Cash & Cash Equivalents to Total Liabilities. The company scored the max on each ratio for good metrics in comparison to debt.
For Interest Coverage Ratio, we look for over 1.5. Under a 1 indicates a company is having problems generating cash flow to pay interest expenses. GIL scores very well on this metric with 29.3.
Overall, GIL has reasonable debt levels as well as the profits and cash flows to manage it and maintain good financial health.
In our growth section, we looked at the company's projections of their growth during the 2013 and 2014 fiscal years. We saw that looking back at the past five years, the company has seen negative margin growth. The current and next fiscal years look more promising and forecast both revenue and EPS growth. Let's look at what GIL is undertaking in order to create this growth.
GIL recently announced that it has signed an agreement to acquire all of the assets of New Buffalo Shirt Factory Inc. and its operating affiliate in Honduras for approximately $7 million. New Buffalo is a leading screen-printing and apparel decoration company that provides high-quality screen-printing and decoration of apparel for global lifestyle and athletic brands. GIL is acquiring New Buffalo to develop its business with Anvil, a major business affiliate of the company. GIL also hopes to benefit from New Buffalo's customer base and fully utilize the capacity of the New Buffalo facilities.
GIL believes that although its main focus has been to grow strategically through continued development of its company-owned brands sold through print-wear distributors and retailers, they have growth opportunity to build on Anvil's business as a supply chain partner to global consumer brands. These types of customers are increasingly looking for opportunities to consolidate their sourcing with large-scale manufacturers who are located in the Western Hemisphere and who can be trusted to ensure their brand reputation for product quality and are committed to the highest standards of corporate responsibility. GIL believes it can tap into this demand and take advantage of these growth opportunities.
In its Q2 report, the company updated its investors on the process of acquiring New Buffalo. They report that they are also investing $85 million in yarn spinning. The ramp-up of the Rio Nance V textile facility, where the yarn spinning is based, is now essentially complete. GIL is currently upgrading equipment at the former Anvil facility in Honduras to enable the company to produce more specialized products. The company has decided to increase the use of the Anvil manufacturing facility and ramp-up Rio Nance I, another facility in the area, beginning Q4 of 2013. GIL is also making investments in its biomass facilities at Rio Nance and is beginning construction of its Honduran distribution center.
All of this development is with the end goal to acquire Gold Toe and Anvil. The company is in the process of repaying the bank indebtedness incurred by the acquisition of these two companies and hopes to end the deals by the end of the 2013 fiscal year.
GIL has many different company acquisitions in play and is investing a lot of their resources into integrating these companies. This company has a good amount of growth potential in its future; we just will have to see when the company starts seeing the returns on their large investments.
Price Target Analysis
Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for GIL: 8.85%
PV Factor of WACC
PV of Available Cash Flow
For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for GIL: 5.85%
Available Cash Flow
Divided by Cap Rate
Multiply by 20167PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
Divide equity value by shares outstanding: