Hanesbrands (HBI) was recently spunoff from Sara Lee. Hanes isn't a fantastic company and it isn't even in a fantastic industry, but it does have several things going for it.

While Hanes was a subsidiary of SaraLee, it was run as a cash generator. As a result, cash was not reinvested in the company and there was little desire to change Hanes to make it more profitable. It was a reliable cash generator. It did its job.

Overview
As with all spinoffs, Hanes' management team's incentives are now tied to the performance of the company. Increasing margins and sales growth now directly benefits those who are running the company. The debt which Hanes assumed as a result of the spinoff is significant and does pose a threat, if you believe Hanes may be incapable of making interest payments. However, the debt is almost equal to the equity, and if you believe (as I do) that Hanes will be capable of paying down its debt, we will see book value double.

Now that Hanes' management benefits from growth, they are looking to ramp up marketing efforts while cutting costs. When looking at expenses, there is a lot of "low-hanging fruit." A look at the many press releases announcing closures and relocations of manufacturing facilities demonstrates that there are indeed ways to immediately cut costs and expand margins.

The marketing initiative should curb revenue declines and eventually cause top line growth. Longer term, expansion into India and China which were previously untapped markets, provides significant upside.

Competitive Advantages
Many are inclined to say that Hanes' brands aren't all that valuable because Hanes' products are mere commodities. However, because their products are intimate apparel, more brand loyalty exists than with many other commodities. But this isn't where the real value in Hanes is. Hanes is a vertically integrated company. Hanes can produce underwear at a lower cost than its unbranded competitors. At any given price, Hanes experiences better margins than the competition. It is for this reason that competitors choose to embelish their products with varying colours, embroidery, jewels, etc. Next time you are at Target, take notice. Hanes has better brands and can produce the same product for less. This is why I am unconcerned with unbranded competition. Competitors have little motivation to compete on price and should continue to differentiate themselves by adding other features.

Underpriced
There are also some factors that may have caused Hanes to be underpriced after the spinoff. Hanes is experiencing declining sales. We are in a bull market where investors are favouring companies that are in growth mode. I don’t think many people gave this company too much thought as an investment opportunity.

The reason Hanes was spunoff had absolutely nothing to do with the company. Sara Lee spunoff Hanes because it was facing pressure from shareholders to return to growth and focus on food. It's hard to convince people that underwear and food are a natural fit, so Hanes was spunoff, along with other subsidiaries.

Conclusion
It is difficult to determine when Hanes' sales will return to growth. It's also hard to determine when margins will expand and when we'll see benefits from entering India and China. However, just because we cannot quantify the upside doesn't mean this is an unfit investment. I believe it was Phil Fisher who said if you eliminate the downside, there's nowhere to go but up. Hanes has very little downside. It is in nobody's interest for the company to go bankrupt, and as an independent company we will begin to see (and have seen) many changes that will only add value.

Disclosure: Author is long HBI