Is Gildan Activewear (TSX:GIL) stock undervalued?

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Warren Buffett said investors should buy the stocks of big companies and hold them forever. At Motley Fool, we take Buffett’s advice to heart and believe in the power of a long-term perspective in investing.

Everyone likes to find an undervalued good stock. During a market correction, even the shares of the best companies will fall, providing brave investors with a rare opportunity to buy them at a discount. In many ways, the best value investors make their fortunes buying the stocks of battered but otherwise solid companies.

Company

Gildan Sportswear (TSX:GIL)(NYSE:GIL) manufactures and sells various apparel products throughout the world, including its various activewear and underwear products: t-shirts, fleece tops and bottoms, shirts sportswear, shapewear and underwear. The company sells its products to wholesale distributors, screen printers and embellishers, as well as online retailers and lifestyle brands.

GIL posted decent margins for its sector, with an operating margin of 18.80%. The fundamentals are also good, with a return on assets of 11.31% and a return on equity of 37.20%. The company has seen good growth recently, with quarterly revenue growth of 31.40% year-over-year (YoY) and quarterly profit growth of 48.50%. GIL also pays a modest dividend yield of 2.31%.

Evaluation

Currently, GIL is trading at $36.12, which is extremely close to the 52-week low of $35.62. This indicates that the GIL may have bottomed out, especially if volume has fallen.

GIL currently has a market capitalization of $7.07 billion, giving it an enterprise value of $7.9 billion with an enterprise value to EBITDA ratio of 9.55, which is similar to its peers in the consumer discretionary sector.

Over the past 12 months, GIL’s price-to-earnings ratio was 10.8, with a price-to-free cash flow ratio of 17.87, a price-to-book ratio of 3.81, a price-to-sales ratio of of 2.28, and book value per share of approximately $9.81. In terms of these measures, GIL does not appear to be undervalued.

GIL is currently covered by a total of 21 analysts. Among them, 16 issued a “buy” rating, none issued a “sell” rating and five issued a “hold” rating. This is generally considered a bullish sign, since the majority of odds are “buy”.

GIL has a Graham’s number of 27.63 for the past 12 months – a measure of a stock’s upper bound intrinsic value based on its earnings per share and book value per share. Generally, if the stock price is below the Graham number, it is considered undervalued and worth investing in. In this case, GIL does not seem undervalued.

The insane takeaway

Current valuation metrics do not indicate that GIL is sufficiently undervalued to buy with a margin of safety. However, while the current stock price is more or less fairly priced, long-term investors should consider establishing a position if they have the capital. Over the next 10-20 years, your price of entry won’t matter as much if GIL continues its strong track record of growth and profitability. Consistently buying shares of GIL, especially if the market corrects, can be a great way to lock in a low-cost base.

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