2 stocks ready for a bull run
As the pandemic fades into history, investors have turned to undervalued stocks that could benefit from a reopening of the economy. It can be frustrating to see stocks of great companies you like not performing well, but there are some promising value games you can buy today that could improve your returns.
Two companies that see improving business trends are Mattel (NASDAQ: MAT) and Hanesbrands (NYSE: HBI). Both companies have experienced a turnaround in recent years, but their recent results are promising. More importantly, these stocks are really cheap and Hanesbrands even offers an attractive dividend yield to boot. Here’s what you need to know.
In 2018, new CEO Ynon Kreiz pledged to make Mattel an “intellectual property-based high performance toy company”. After years of struggling with declining sales and an inflated cost structure, Mattel is finally starting to show real progress in its turnaround. The stock is up 137% from last year, but there is still a significant valuation gap between Mattel and its rival Hasbro this could mean additional gains over the next few years.
After a year in which Mattel recorded 2% sales growth and a notable improvement in bottom line, the company again achieved its third consecutive quarter of market share gains in the first quarter. Net sales jumped 47% year-over-year in the first quarter of 2021, benefiting from lower sales in the last year’s quarter at the start of the pandemic. Mattel saw balanced growth across all categories, including 86% growth for Barbie, 16% for Hot Wheels, and a 101% increase in figure sales.
Mattel is on the verge of taking the plunge under Kreiz’s leadership. Improved operational efficiency led to a noticeable improvement in free cash flow, which totaled $ 305 million in the last four quarters, compared to just $ 72 million in the first quarter of 2020. Mattel is targeting $ 250 million additional dollars in additional cost savings by 2023, and given Kreiz’s record trajectory to date, investors can bank on that target.
Mattel seeks the same opportunities as Hasbro in film, digital games and e-commerce. Mattel has several feature film and TV series projects in development and works with a Chinese game company NetEase to grant its intellectual property on digital games through its joint venture Mattel163.
The stock is trading at a significant discount to Hasbro based on the sales price. At current levels, Mattel is trading at a 39% discount to its counterpart. As the company continues to improve its margin and growth profile, this valuation gap may also continue to narrow, making Mattel a compelling value stock to buy now.
Hanesbrands is also undergoing a transformation to improve its performance. Although he’s much further along in his journey than Mattel, the stock still offers a huge long-term advantage over its current stock price.
The Champion brand has been a winner in recent years, with sales growing to a level that would make lululemon athletica jealous. Management sees more room for double-digit growth and targets Champion’s annual revenue of $ 3 billion by the end of 2024.
Meanwhile, the interior clothing industry, including Hanes and Maidenform, is starting to take a turn. This segment saw its sales fall 3% per year between 2017 and 2019, but homewear saw a 35% year-over-year sales increase in the first quarter.
Overall, management is calling for 6% annualized sales growth through 2024. Hanesbrands shares fell earlier in May after the first quarter earnings report, but as investors digest the improvements underway across the company, the stock could climb.
The stock is still cheap even after doubling in value over the past year. It trades at a forward price-to-earnings ratio of 12.1, with an above-average dividend yield of 3.1%, backed by $ 502 million in free cash flow. If the company succeeds in meeting management’s target of 9% annualized adjusted earnings growth, the current price level may look like a bargain in hindsight.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.