Gildan Activewear Inc.
(GIL-N, GIL-T) US$35.28 | $44.17
Q2/21 Results: Conviction Growing in Earnings Potential Event
Yesterday, Gildan reported Q2/21 Adjusted EPS of $0.68 that handily exceeded our forecast/consensus of $0.50/$0.51.
Impact: POSITIVE
Q2/21 Results Summary: We believe that the Q2/21 EPS outperformance supports our positive investment thesis on Gildan. This includes an improving demand environment as the North American economy reopens; market-share gains within its key verticals; cost-saving initiatives being optimized, leading to operating margin improvement; and the leverage ratio improving that should heighten the future return of capital to shareholders. Although near-term industry and economic headwinds persist, we believe that Gildan's EPS growth potential is gaining visibility that should lead to heightened investor confidence in its outlook.
Operating Margin Target: Gildan highlighted that production has returned to its pre-pandemic level to meet the strengthening demand environment spurred by the U.S. economy reopening. With rising unit volumes and its cost-optimization initiatives, management stated that it is comfortable in its ability to achieve its 18% target operating margin this year. This is not baked into consensus expectations, that should result in notable upward financial revisions. Despite labour shortages (yarn spinning) and inflationary cost pressure, we believe that Gildan has the ability to achieve this target over our investment horizon, aided by its cost-structure advantage, modest price increases, and further cost-saving initiatives. This should be supported by a tight supply market and increasing replenishment needs.
Financial Position: Strong FCF lowered Gildan's leverage to 0.6x from 3.5x at the end of 2020. This is below its target leverage of 1.0x-2.0x that along with its positive outlook enabled the Board to recommence its NCIB.
Recommendation: We were underwhelmed by the share-price reaction to Gildan's Q2/21 release. Frankly, it provided us with more conviction in our growth forecasts and investment thesis. It is our view that as Gildan continues to gain share and deliver earnings growth, investors will shift their focus toward the company's mid- to long- term earnings potential that we view as materially higher.
TD Investment Conclusion
We are raising our recommendation to ACTION LIST BUY from Buy and our target price to US$48.00 from US$42.00. We believe that Gildan's growth potential is currently underappreciated