Friday, Credit Suisse initiated coverage of Gildan Activewear Inc. (GIL) stock with a Neutral rating and a price target of $8.
Analyst Saad believes that deteriorating sales to the highly discretionary screenprinting channel and the failure to penetrate the retail channel will overshadow the cheap valuation and underlying enterprise value. The analyst's price target of $8 equates to 11 times his Street-low 2009 EPS estimate of $0.70, in line with the sector average.
The analyst believes Gildan misstepped when it decided to leave the comfort of the screenprint channel to go after the unfamiliar consumer market. The analyst is worried by Gildan's decision-as market leader-to get aggressive on pricing, a strategy more likely to pressure margins than stimulate demand in this environment.
The analyst's largest concern for Gildan is that falling sales will cause significant deleveraging on the $600 million of capital expenditures since 2003 in anticipation of continued screenprint volume growth and penetration of the large retail market.
While the earnings profile is risky, given that Gildan has long proven itself to be an efficient and innovative manufacturer with a set of great production assets, the analyst does believe there is a meaningful underlying asset value to support the share price.
Currently, GIL is down $0.18 or 2.08% and trading at $8.46.
For comments and feedback: editorial@rttnews.com