The stock market tends to go overboard from time to time. There are legitimate reasons investors should be wary of AT&T(NYSE: T) and Hanesbrands(NYSE: HBI), for example. The telecom giant is facing an increasingly competitive environment, and the apparel manufacturer is still recovering from supply chain issues and excessive inventory levels.
But shares of both stocks are now priced for catastrophe after tumbling from their pandemic-era highs. While investing in AT&T and Hanesbrands will require patience, the payoff could be enormous as each company rights its respective ship.
AT&T
Telecom giant AT&T trades for just 6.5 times its guidance for free cash flow. The stock sports a 7.5% dividend yield. The company is still gaining wireless subscribers at a healthy, albeit subdued, pace, and its fiber business is booming.
But there's a lot of debt on the balance sheet, and investors rightfully don't trust the company after its failed attempt to transform itself into a media conglomerate. AT&T stock is down nearly 40% from its pandemic-era high.
What will it take for AT&T stock to recover? The company probably needs to prove to investors that its free cash flow generation is sustainable. There are a lot of moving parts, including distributions from DirecTV. The company is exploring options for getting rid of its majority stake in the satellite TV provider, probably a good move as the pay-TV industry continues to shift toward streaming.
The wireless industry is becoming more competitive, which could put pressure on AT&T's profits. Competitor T-Mobile has been laying off employees as it braces for a tougher environment ahead, and cable companies acting as MNVOs have been aggressively courting wireless subscribers. AT&T CEO John Stankey has said he's not worried about cable companies and their unsustainable practices, but in the short term, this competition could hurt AT&T's ability to increase its subscriber count.
While AT&T is certainly facing headwinds, the stock is priced for complete disaster. If the company can continue to win subscribers, meet its free cash flow target for this year, and provide guidance for 2024 that's not as bad as the market seems to be expecting, the stock could be in for a major recovery.
Hanesbrands
Apparel manufacturer Hanesbrands has been having a tough time coping with the post-pandemic economy. Both the company itself and some of its customers had built up too much inventory, leading to a steep drop in sales across both innerwear and activewear. At the same time, supply chain issues were raising costs. Add in a high debt load, and it's easy to see why investors are concerned. Hanesbrands stock is down about 75% from its pandemic-era high.
Hanesbrands has made significant progress over the past year. The company has knocked down its inventory by about $160 million in the first six months of 2023; cash flow has turned positive; and Hanesbrands expects to reduce its total debt by $400 million by the end of the year. Margins are still under pressure as the company sells through its higher-cost inventories, but the company plans to exit the year with "meaningfully higher gross and operating margins."
The core innerwear business is starting to show signs of life. Innerwear sales were up 3% year over year in the second quarter, and segment operating margin expanded to 17.6%. The activewear business was a different story, with a 19% sales decline and a small operating loss. Hanesbrands is now exploring strategic options for its Champion brand, which could result in a spin-off or a sale.
Hanesbrands is successfully stabilizing itself, and it should have the resources to make it through a tough economic environment. The company has $965 million in total liquidity available, and with cash flow back in positive territory, it's no longer drawing down its reserves. For the full year, Hanesbrands expects to produce free cash flow of $450 million, along with positive GAAP and non-GAAP operating income.
Here's the thing: Hanesbrands is valued at about $1.4 billion, which puts the price-to-free-cash-flow ratio at about 3. Once the worst is fully behind the company, the stock has the potential to explode higher. A recession would drag this process out, and a potential sale of the Champion business is a wildcard. But Hanesbrands stock looks like a risk worth taking.
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Timothy Green has positions in AT&T and Hanesbrands. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.
