Hanesbrands Inc. (NYSE:HBI) shares are up more than 9.78% this year and recently increased 0.08% or $0.02 to settle at $23.68. V.F. Corporation (NYSE:VFC), on the other hand, is up 20.79% year to date as of 10/12/2017. It currently trades at $64.44 and has returned -0.45% during the past week.
Hanesbrands Inc. (NYSE:HBI) and V.F. Corporation (NYSE:VFC) are the two most active stocks in the Textile – Apparel Clothing industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect HBI to grow earnings at a 10.83% annual rate over the next 5 years. Comparatively, VFC is expected to grow at a 7.60% annual rate. All else equal, HBI’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. EBITDA margin of 13.31% for V.F. Corporation (VFC). HBI’s ROI is 14.90% while VFC has a ROI of 17.30%. The interpretation is that VFC’s business generates a higher return on investment than HBI’s.
The value of a stock is simply the present value of its future free cash flows. HBI’s free cash flow (“FCF”) per share for the trailing twelve months was -0.03. Comparatively, VFC’s free cash flow per share was +0.01. On a percent-of-sales basis, HBI’s free cash flow was -0.18% while VFC converted 0.03% of its revenues into cash flow. This means that, for a given level of sales, VFC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HBI has a current ratio of 2.00 compared to 1.60 for VFC. This means that HBI can more easily cover its most immediate liabilities over the next twelve months. HBI’s debt-to-equity ratio is 3.92 versus a D/E of 0.90 for VFC. HBI is therefore the more solvent of the two companies, and has lower financial risk.
HBI trades at a forward P/E of 10.99, a P/B of 8.03, and a P/S of 1.35, compared to a forward P/E of 19.14, a P/B of 7.02, and a P/S of 2.16 for VFC. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. HBI is currently priced at a -13.89% to its one-year price target of 27.50. Comparatively, VFC is -1.3% relative to its price target of 65.29. This suggests that HBI is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for HBI and 2.50 for VFC, which implies that analysts are more bullish on the outlook for VFC.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. HBI has a beta of 0.77 and VFC’s beta is 0.77. VFC’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. HBI has a short ratio of 15.79 compared to a short interest of 9.22 for VFC. This implies that the market is currently less bearish on the outlook for VFC.
V.F. Corporation (NYSE:VFC) beats Hanesbrands Inc. (NYSE:HBI) on a total of 7 of the 14 factors compared between the two stocks. VFC is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, VFC has better sentiment signals based on short interest.