Gildan Activewear (TSE: GIL) (GIL) manufactures and sells printwear and branded apparel. Its products include activewear, underwear, socks, hosiery, and legwear.

The firm operates under the following brands: Gildan, American Apparel, Comfort Colors, Gold Toe, Anvil, Secret, and Silks, among others.

Gildan has a measurable competitive advantage with strong backing from the analyst community. However, it's possible that the company is trading near fair value already.

Gildan's Competitive Advantage

There are a couple of ways to quantify a company's competitive advantage using only its income statement. The first method involves calculating a company's earnings power value (EPV).

Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value (the cost to reproduce/replicate the business) can be measured using a company's total asset value. If the earnings power value is higher than the reproduction value, then a company is considered to have a competitive advantage.

For Gildan, the calculation is as follows:

EPV = EPV adjusted earnings / WACC
$4,744 million = $427 million / 0.09

Since Gildan has a total asset value of $3,350 million, we can say that it does have a competitive advantage. In other words, assuming no growth for Gildan, it would require $3,350 million of assets to generate $4,744 million in value over time. Please note that all figures in this article are in U.S. Dollars.

The second method to determine if a company has a competitive advantage is by looking at its gross margin because it represents the premium that consumers are willing to pay over the cost of a product or service. An expanding gross margin indicates that a sustainable competitive advantage is present.

If an existing company has no edge, then new entrants would gradually take away market share, leading to a decreasing gross margin as pricing wars ensue to remain competitive.

In Gildan's case, its gross margin has remained flat in the past several years, ranging from around 26-29% in the past nine Fiscal years. As a result, its gross margin indicates that a competitive advantage is present in this regard as well.

Valuation

I will use a single-stage DCF model to value Gildan because its free cash flows are cyclical and difficult to predict. For the terminal growth rate, I will use the 30-year Government of Canada bond yield as a proxy for expected long-term GDP growth.

The calculation is as follows:

Fair Value = Average FCF per share / (Discount Rate - Terminal Growth)

$29.85 = $2 / (0.1 - 0.033)

As a result, I estimate that the fair value of Gildan is approximately $29.85 under current market conditions. With its share price near $27, the stock is likely undervalued, but not by much.

Wall Street's Take

Turning to Wall Street, Gildan has a Strong Buy consensus rating based on five Buys assigned in the past three months. The average Gildan price target of $48.67 implies 78.5% upside potential.

Final Thoughts

Gildan has solid fundamentals with a measurable competitive advantage. However, it appears that most analysts are currently over-optimistic with their price targets, as the stock price is currently near fair value.

Disclosure