Gildan Activeware: High Quality at an Attractive Price

How about that market, huh kids?

By now, you’ve likely seen the stats on how this is one of the worst starts of the year ever for the S&P 500. If you haven’t, here it is:

The Canadian market has held up a little better (thanks, energy), but the TSX is down nearly 9% this year.

My Canadian centric approach has certainly helped lessen the impact of this bear market, at least compared to some of my friends from down south. And my insisting on dividends dulls the pain a little more. It’s nice to see money flow into the account on a consistent basis.

But bear markets do have one big advantage. You can buy cheap shares of high-quality companies, organizations that the market has fallen out of love with, for a very reasonable valuation. I’ve been doing just that lately with one such company, Gildan Activeware (TSX:GIL)(NYSE:GIL).

Here’s why I think it checks all the boxes.

The skinny

Gildan Activeware is a vertically integrated manufacturer of everyday activeware, primarily t-shirts, socks, and underwear. It primarily sells to wholesale imprintable companies, who then sell to companies that put logos or whatnot on them. Gildan also has a national account business, selling products directly to retailers like American Apparel, Amazon, and Wal-Mart, and through licensing agreements, like what it signed with Under Armour to do its sock business. The majority of its business is to wholesale imprintable distributors, which would obviously be hit in a recession.

Your author, for what its worth, wore a Gildan t-shirt while he typed this piece.

I’m the first to admit the clothing business is competitive. But I think Gildan has a moat in a couple important ways. Firstly, the company is vertically integrated. It does everything from the yarn spinning to the fabric dyeing to actual manufacturing in house. That protects it during inflationary environments. And secondly, Gildan has the majority of its production in the western hemisphere, which saves it money on shipping costs, avoids the wage inflation spiral that’s plagued China for the last few years, and allows it to not get in the middle of an ever-escalating trade war between the U.S. and China.

It also allows them to be very competitive on cost, as the following illustrates:

At the end of the day, only one thing matters in this business. A t-shirt is a t-shirt. As long as the quality isn’t trash, the lowest price will win. And Gildan has the lowest priced business model.

Gildan sees solid growth from both parts of its business. The company did US$2.9B in revenue during 2021. Analysts expect 2022’s top line to grow to US$3.3B, with US$3.7B in revenue in 2024. A few things are projected to drive growth including expansion into European, Australian, and Asian markets through its new Bangladesh manufacturing facility, further inroads into the private label business for major retailers, and a general expansion of the North American casual clothing market, driven by things like remote-based work. Gildan also sees opportunities in areas like fleece and polo shirts, segments of the market where it isn’t a big player.

The company’s guidance is largely inline with analyst projections, with management guiding to 2024’s revenue in the range of US$3.7 to US$3.9B and operating margins in the 18-20% range. That translates into earnings per share closer to US$4, a very reasonable valuation for a stock currently trading on the NYSE for $31.

The financials

One thing I like to do for companies like Gildan is compare it five years ago to today. I quickly did so on Twitter earlier this week, and we’ll go a little more in depth today.

Gildan (fiscal 2016)

Revenue: $2.6BOperating margin: 14.8%Earnings: $347MEPS: $1.47Shares outstanding: 236M

Gildan (TTM)

Revenue: $3.2BOperating margin: 18.8%Earnings: $667MEPS: $3.47Shares outstanding: 192M

(All USD)

And to further illustrate what a bargain Gildan is today:

Share price Sept 2017 (NYSE): $30.84Share price Sept 2022 (NYSE): $31.19

Share price Sept 2017 (TSX): $37.98Share price Sept 2022 (TSX): $41.40

Gildan’s management team has done an excellent job growing the business. Thanks to consistent share buybacks and excellent results, EPS is up approximately 150% in just five years. It has given back to shareholders via a consistently increasing dividend (minus a dividend suspension in 2020) and share buybacks. Every major metric has improved over the last five years.

And despite this, shares trade hands for about 9x TTM earnings. I simply don’t get it.

Gildan is also an excellent long-term performer. $10,000 invested in the company 20 years ago would have grown to $113,597, assuming all dividends were reinvested. That’s good enough for a 12.91% CAGR. I’d gladly take that over the next 20 years, and I’m guessing most people reading this would as well.

The bottom line

This is the kind of post where I feel a little underwhelmed at the end. There’s no ground-breaking analysis here, nothing that’ll get me mentioned in one of those great investment analysis threads on Twitter. This is simply a great company trading at a very reasonable valuation because the market is concerned about a recession.

I’m happy to buy stocks like this all day long. I’ll tuck this one away and let it do its thing over the next 20 years. I think I’ll be very happy with the result.

Remember, your portfolio doesn’t give you bonus points for more complex ideas. Returns are returns, even if they come from what I view as pretty simple stocks. So don’t sweat it. Just go watch football or something.

Author owns Gildan Activeware shares