While textile companies may produce sexy product lines, their business models and profitability are often far less attractive. With the likes of Wal-mart (NYSE:WMT) constantly pressuring the margins of such companies, losses have mounted across the sector.
But if you travel to the north of Israel and take a few wrong turns, you will find a company in the middle of nowhere that has changed the face of the textile business and created a high-tech company out of what is maybe the most labor intensive industry that exists.
Tefron (TFR) has leveraged its expertise in designing “to the body” intimate clothing, becoming the global leader in seamless and engineered apparel, and taking a dominant market position in performance sportswear. If you look at the shirt you are wearing, you will see all of the stitches and seams that make it into the garment it is. To produce one shirt is a labor-intensive task. Yet Tefron’s seamless technology eliminates this labor.
One indication of this company’s achievements is that apparel giant Nike (NYSE:NKE) is establishing a “Center of Excellence” partnership with Tefron to produce an entire line of active wear based on this technology. Through this strategic partnership, Tefron will serve as Nike’s primary source in the development and manufacture of Nike’s seamless products in its Global, Seamless and Pro projects.
While the size of this market is approximately half a billion dollars, many in the industry believe this will grow to more than $3 billion in the next 3-4 years. Anticipating this aggressive growth, Nike, which may be one of the most successful marketing companies of all time, will invest $50 million just to market this product line.
The stock is now trading 20% off its high (around $11.30 as of 9/21/06), in part due to the seasonality of its swimwear business. As we head into the fourth quarter of the year, traditionally the strongest for the company, we will possibly see a strong rebound in the swimwear business, which, incidentally, is not the major growth engine behind the company.
Also contributing to the slump in share price was some investor worry about how the recent conflict with Hizbullah would affect Tefron’s ability to meet its production goals. However, there has not been any recent evidence to justify that fear.
With a strong increase in gross margins of 21.7% from 14.7%, and continued profit growth in the high to mid-teens, the share price looks cheap especially when comparing it to other textile firms. The share is currently trading with a dividend yield of 2.20%, which is an added bonus. In my opinion, the sell-off in the stock is overdone, and we can see potential for a strong fourth quarter and continued growth in 2007.
Disclosure: In the normal course of doing business, we may buy or sell shares of the securities discussed herein for our personal accounts, our corporate accounts, or our clients’ accounts.