Delta Apparel: Growth at an unreasonably cheap price (NYSE: DLA)

glegorly/iStock via Getty Images

Key points of the thesis

Delta Apparel (DLA) currently trades as an undifferentiated legacy manufacturing company in a commoditized industry (~7x forward P/E assuming a reasonable estimate for FY22) despite its competitive advantages in digital apparel printing, its unique vertical integration and healthy growth prospects for two key business areas.

As its shares trade at a fraction of market multiples, DLA is well positioned to sustain double-digit earnings and FCF growth rates for the next 5 years.

I have a DCF price target of $65/share and I see a significant rise in the stock because:

1. DLA’s core business benefits from a multi-year industry shift towards a near/onshore supply chain in North America to reduce exposure to shipping delays overseas, overseas cost inflation and unpredictability

2. DLA enjoys a strong pricing environment where it can set prices that are more than offset by input cost inflation while remaining extremely competitive with products originating in Asia, given recent freight increases there -low.

3. DTG2Go, DLA’s digital printing business, is expected to grow around 20% annually (with EBITDA margins of over 20%), benefiting from the industry shift towards printing digital, sustainability and personalization

4. Favorable business mix will lead to accelerated EBITDA growth as DTG2Go and Salt Life (margin accretive segments with a long track of reinvestment opportunities) represent around 25% of revenue, but could reach around 40% by FY26 based on current forecasts.

5. Management is currently authorized to repurchase $7.5 million in stock

You will find more details in the presentation below.