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Montreal-based Gildan Activewear (NYSE: GIL ) saw its stock surge on its earnings beat. The Canadian-American apparel company climbed higher by 21.4% in Thursday trading following the announcement. Now, investors must decide what to do about GIL stock following this move. While investors might feel the temptation to open a position, they should consider both the financials and the competitive position of Gildan before buying GIL stock.
GIL Stock Rockets Higher
GIL stock reported second-quarter earnings per share (EPS) of 52 cents. This beat Wall Street estimates by 3 cents per share. The results also gave Gildan some unexpected year-over-year growth as the company reported 49 cents per share in the same quarter last year. Revenues of $764.2 million also beat estimates by $35.8 million. The company saw a 6.8% increase in revenue from the same quarter the previous year.
Gildan also believes 2018 earnings will come in at the upward end of its previous guidance. The company now expects EPS to come in between $1.85 and $1.90. It had previously estimated between $1.80 and $1.90 per share for this period.
Wall Street responded well to this news. In Thursday trading, the stock price rose to $31.55 per share. This move marked a dramatic reversal. GIL stock moved from trading close to the stock's 52-week low to a level closer to its 52-week high instantly. Before this move, the stock had lost about 26% of its value since February. Today, the stock trades around 10% below the 52-week high.
GIL Stock Still Lacks Moat
The question now hinges on whether new buyers should come in at these levels. The short answer in my view is probably not. To be sure, Gildan outperforms many other apparel companies such as Hanesbrands (NYSE: HBI ) and PVH (NYSE: PVH ).
However, none of this changes the fact that GIL stock lacks a moat. Innovation rarely springs from producing socks and underwear. Sure, Gildan possesses the resources to produce such products in a low-cost market such as Bangladesh, ship the products to North America, and sell at a low cost.
Still, other companies can do this as well. Moreover, shelf space at a Costco (NASDAQ: COST ) or another large brick-and-mortar retailer no longer serves as a moat. Companies who succeed in other no-moat industries, such as Procter & Gamble (NYSE: PG ) or Kellogg's (NYSE: K ) now face competitive threats from small businesses that can sell to their customer base through a Shopify (NYSE: SHOP ) store online. By the same token, upstart companies can compete with Gildan by starting a store on a site such as Etsy (NASDAQ: ETSY ).
Expect Average Performance From GIL Stock
GIL stock has performed well considering such threats. The company saw mid-to-high single-digit growth in both revenue and earnings in past years. Analysts predict profits will grow by an average of 9.2% per year over the next five years.
However, most metrics indicate the stock trades close to fair value. The dividend yield of about 1.4% falls below the average S&P 500 yield of 1.8%. Also, the forward price-to-earnings (PE) ratio stands at around 17. The company has supported an average PE of 22.3 over the last five years. When factoring in the lack of a moat, this does not constitute enough of a discount to buy, in my view. I expect Gildan will continue to grow steadily over the next few years as a company. However, given the metrics, I see little incentive to buy GIL stock.
Bottom Line on GIL Stock
Although investors might find themselves drawn to GIL stock due to its post-earnings surge, investors should approach this equity cautiously. The stock rose by more than 21% on its earnings beat. However, given current valuation metrics, GIL stock does not trade far below its fair value.
Also, despite the company's growth, investors need to remember that Gildan operates in a no-moat industry. While the company can source these products cheaply, shelf space ceases to act as a moat in a world of online shopping. Few would describe the 17 PE ratio for GIL stock as expensive. However, its competitive position does not make such a multiple compelling either.
I predict Gildan Activewear will see moderate growth as a company for the foreseeable future. However, GIL stock offers little to attract buyers at this stage.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You canfollow Will on Twitterat @HealyWriting.
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