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While watching the Duke vs. Michigan State college basketball game, I came across a new company. An advertisement for Gildan (NYSE:GIL), a clothing company, piqued my interest, and I began digging in to this company.

Gildan is a large clothing retailer, based in Canada, which focuses on shirts, socks, and underwear as a wholesale business. The company owns brands like Goldtoe, PowerSox, SilverToe, All Pro, Auro, GT, and Gildan. Gildan is responsible for supplying socks to large companies like New Balance and Under Armour (NYSE:UA) as well. Consumers don’t always know when they are purchasing Gildan products. Gildan clothing products are used for work uniforms and also are supplied to several large clothing companies.

Highlights from the 2010 Annual Report:

  • Sales Growth 26%
  • 104% Rise in Earnings Per Share
  • Strong Cash Flow of $176 Million
  • Maintained Leadership Position in US Screenprint Market
  • Increased Market Share to 64% in Wholesale Distributor
  • Increased International Sales by 60%
  • Won Several Vendor of the Year Awards in Canada and the United States
  • Gildan Products now Sold in 5,000 Retail Stores
  • Implemented a Dividend
  • No Debt, and Over $260 Million in Cash
  • Earnings Per Share of $1.63

Fiscal third-quarter earnings for Gildan were released in August. The company reported earnings per share of $0.77, which was an increase of over 40% from the previous year. The earnings per share also beat analysts’ consensus target of $0.70. A quarterly dividend of $0.075 was also announced during the earnings call. Gildan reported guidance of $2.00 earnings per share for the fiscal year as well.

Margins continue to be in the high 20% range and have risen. Declines in T-shirts and fleeces were partially offset by sport shirts and socks. The acquisition of the Gold Toe brand has helped overall sales and brought free cash flow levels higher. The company did take on $250 million in debt from the deal after previously having no long-term debt on the books.

The largest competitors to Gildan are Russell brands, Fruit of the Loom, and Hanes. Russell and Fruit of the Loom are both owned subsidiaries of Berkshire Hathaway (NYSE:BRK.A). Hanes is publicly traded as Hanesbrands Inc (NYSE:HBI). Gildan is more of a wholesale brand than any of these other brands. The licenses which Gildan has with Under Armor and New Balance are helping it gain market share in the sock category. Already dominant in the shirt category, Gildan has room and the ability to compete with these other companies across other clothing pieces.

Gildan has beat analysts’ estimates each of the last four quarters. The current quarter calls for $0.32 earnings per share. The company predicted slow to flat growth across several business operations. It is quite possible earnings will come in at $0.35 and could provide a nice boost to the stock. Earnings will be announced on the morning of December 1.

Quarterly dividends, which were recently implemented at the beginning of 2011, amount to $0.075 per share. This annual $0.30 collected per share currently represents a yield of close to 1.2%. This yield is not substantial, but provides a nice income from this stock poised to break out. Stock splits in 2001, 2005, and 2007 have provided a nice return to investors along the way.

Share trade around $25.75 as I write this article, and are fast approaching a 52-week low. Shares have traded in a range of $23.14 to $38.07. With earnings of $2.00 forecast for the year, shares trade at around 13 times earnings per share. Shares should trade closer to 17 times earnings which would bring shares up to $34.

In my opinion, shares appear to be undervalued by more than 30%. Look for a dividend boost to come this next quarter or in the following year. I would not be surprised to see this $3 billion company become an acquisition target of private equity or a larger clothing player, perhaps Berkshire Hathaway.

Source: Gildan Is Strong, Growing, And Could Be A Buyout Target