However, there are many situations (and here is usually where you find some bargains) where the EV/EBIT measure is not the most useful. When I can predict a high free cash flow margin with confidence, I use a very long-term discounted cash flows calculation. For instance, this is what I would do with HanesBrands (HBI), which was recently spun-off from Sara Lee (SLE). On an EV/EBIT basis, it may not look cheap. But, looking truly long-term, I'm convinced the intrinsic value of each share is much closer to the $45 - $65 range than the roughly $23.00 a share at which it now trades. But, that's a special case – Hanes is a special business.
I wrote a post on Hanes back on July 23, 2007. That’s also where I mentioned that Hanes had been the sole idea slated for the October 2006 issue of my newsletter, but I shut down the newsletter because I felt one idea couldn’t justify the $75 price tag.
Three days earlier (July 20th, 2007) I had written:
If you're looking for a stock where leverage will amplify your returns, I still like Hanes Brands (HBI). It's not as leveraged as Journal Register (though it has plenty of leverage) and it's a much better business. Hanes was the most interesting spin-off of last year and the stock did well enough but has since cooled off a bit.
Note that I've yet to find someone who agrees with me on Hanes. I'm not sure if that's a good sign or a bad sign.
I loved Hanes at the spin-off price. I still like it at today's price. It's probably not ridiculously undervalued as a business, but the debt will amplify the difference that does exist. Last October, I wrote that Hanes was probably worth more like $45 - $65 a share than $25 a share. I still think that's true; however, the spin-off, plant closings, and debt might obscure the business value for a time. Be patient.
My only post focused solely on Hanes was written on July 20th, 2007 and is basically a collage made from the much longer newsletter piece I had written for October of 2006.
That issue was never published, so I made a blog post out of the scraps.
Although it’s an old post; you may enjoy reading it.
Regardless, you should definitely read Tilson’s Seeking Alpha post and the accompanying PDF.
They’re both good.