Pat McKeough recently replied to an Inner Circle member looking for an opinion on the clothing manufacturer. While the company expects its purchase of the American Apparel brand to lift its revenue. It has already taken steps to raise its earnings, says Pat.

Q: Can I have your opinion on Gildan Activewear? Do you think it would make a good investment? Thanks

A: GILDAN ACTIVEWEAR INC. (symbol GIL on Toronto; www.gildan.com) manufactures and distributes basic family apparel, including T-shirts, fleece pullovers, sports shirts, underwear and socks. It sells them both under its own name and under licenses with companies such as New Balance and Under Armour.

In June 2016, Gildan expanded its printwear business with the $110 million acquisition of Alstyle Apparel. That operation manufactures and markets activewear such as T-shirts and fleece. It then sells to screenprinters, embellishers and mass-marketers, largely in the U.S. as well as Canada and Mexico. Alstyle’s manufacturing operations include a large-scale textile manufacturing plant and cut-and-sew facilities in Mexico. Its distribution centers are located in the U.S., Canada, and Mexico.

The Alstyle acquisition immediately expands Gildan’s share of printwear markets in the U.S., Canada and Mexico; it also broadens and complements the company’s operations in the western U.S. where Alstyle has a strong presence. In addition, Alstyle’s manufacturing facilities in Mexico will let Gildan take advantage of preferential trade agreements that provide duty-free access to markets in South America.

In the three months ended September 30, 2016, revenue rose 6.0%, to $715.0 million from $674.5 million a year earlier. (All figures except share price and market cap in U.S. dollars.) Excluding one-time items, the company made $116.4 million, or $0.50 a share, down 7.9% from $126.4 million, or $0.52 a share. The decline was mostly due to the cost of integrating Alstyle and higher promotional expenses.

Growth Stocks: Gildan makes important acquisition with American Apparel brand

Gildan has just made another important acquisition. In January, it bought bankrupt American Apparel for $88 million U.S. The purchase was limited to the American Apparel brand and manufacturing facilities in Southern California. It does not include the retailer’s 110 stores. Both Amazon.com and Forever 21 are reportedly interested in taking over American Apparel.

One of Gildan’s key risk factors is that it sells what is essentially a commodity. (The purchase of the American Apparel brand will partially offset that.) While the company has moved most of its production to relatively low-cost countries, it is still vulnerable to competitors who produce the same commodity in lower-wage nations.

Still, Gildan has recently put in place a number of cost-savings measures. It has also better spread out its production across its factories. That should push up earnings per share in 2017 by 25.7%, to $1.91 U.S., from the $1.52 U.S. it likely earned for 2016. The stock now trades at 13.0 times the 2017 estimate. The shares yield 1.3%.

Inner Circle recommendation: Gildan Activewear is okay to hold.

For our recent report on a Canadian growth stock we rate as a buy, read CAE ready to soar.

For our views on making good choices among a key group of growth stocks, read Tech 101: Definitions for successful investing in technology.