This deal might just knock you off your feet

Let’s see how elastic Hanesbrands Inc. shares are. (HBI)….

The company is best known for its underwear – the stock was mentioned in a conversation about Doug Kass. daily diary on real money pro On Thursday after one of the participants noted that after making a profit, his trades are falling. I immediately took advantage of this opportunity by issuing a covered call order. This is one of the reasons I check the Daily Diary almost every day looking for new potential ideas.

Stocks rebounded somewhat from deep oversold levels on Thursday, but are still well suited to trading with call coverage. On Thursday, Hanesbrands released its fourth-quarter earnings report. The highs and lows were roughly in line with expectations. But management cut its sales forecast for the next quarter by about two percent from the average of the new range. Management also forecasts a loss in the first quarter due to earnings of 13 cents per share, which was expected by the consensus of analysts (more on this below). It should be noted that fourth-quarter revenue exceeded the upper limit of the sales forecast, as management reported in its third-quarter earnings report.

A more serious reason for the stock to fall by almost 25% that day was the company’s announcement to suspend dividend payments. With dividend yields in the single digits, the move apparently greatly disappointed investors who own the stock, and they quickly dumped the stock from their portfolio.

There are a few important things to keep in mind here. First, Hanesbrands will continue to be a profitable company, even as management now sees a small loss in the first quarter of 2023. Some unproductive businesses are closing while Hanes is laying off staff, consolidating suppliers and aggressively cutting costs.

Second, the company produces products for which there is significant inelastic demand. Consumers may put off buying a new TV during tough economic times, but underwear is clearly more important. More importantly, the company is using all of its free cash flow from the suspension of dividend payments (60 cents per share per year) to reduce debt. He will do this until he returns the company’s leverage to a range that does not exceed two to three times the ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization.

In the context of rising rates, this is critical for any company with a significant debt burden that will be rolled over. Hanesbrands has approximately US$3.6 billion in long-term debt and a market capitalization of US$2.2 billion. The company expects FY 2023 operating cash flow to be around $500 million. This story is likely to gain momentum in the second half of 2023 thanks to improvements from ongoing initiatives and cost adjustments, not to mention it will be easier to outperform the competition.

Fiscal 2023 will be a watershed for Hanesbrands, but it’s important to remember that the company received nearly a dollar a share of profits in Fiscal 2021 before soaring inflation and ongoing global supply chain problems impacted the outlook for most manufacturers. By the end of 2023, I fully expect the company to reduce its debt burden. Investors at this point should look forward to a more rosy 2024 and restore dividend payments again at some point. In the meantime, I want to get paid while the company is going through a couple of difficult quarters. Therefore, below is a covered calling strategy that makes sense for this name.

Option strategy:

To establish an opening position in HBI using a covered call strategy, do the following: With a $7 call strike in July, place a covered call order with a net debit in the range of $5.85 to $5.95 per share (net share price). option premium). This strategy provides downside protection of approximately 12% and 18% of upside potential, even if the stock does little over the life of the option.

I think this stock is highly likely to be range-limited in the first half of 2023, in which case I would probably extend the trade closer to the option expiration date for another good option premium.

Get email notifications every time I write a real money article. Click “+ Subscribe” next to my signature for this article.

Content Source

News Press Ohio – Latest News:
Columbus Local News || Cleveland Local News || Ohio State News || National News || Money and Economy News || Entertainment News || Tech News || Environment News

Related Articles

Back to top button