2 Risky Stocks That Could Skyrocket

Turnarounds are tough. Multi-year plans often don’t pan out as they get derailed by unexpected events. Progress can be painstakingly slow. Some companies end up in perpetual turnaround mode, never quite figuring out how to return to their former glory.

Apparel manufacturer Hanesbrands (HBI 8.52%) and media giant Warner Bros. Discovery (WBD 8.42%) are both trying to stage comebacks. For Hanesbrands, a tough post-pandemic economy is wrecking demand. For Warner Bros. Discovery, the age of streaming is pressuring the lucrative linear TV business. These stocks are risky, but both have the potential to soar in the coming years.

Hanesbrands

The post-pandemic period has not been kind to apparel manufacturer Hanesbrands. Too much inventory, both on its own balance sheet and among its customers, hurt sales, and inflation drove up costs. The company is working to right the ship, but that won’t be a quick process.

Hanesbrands revenue slumped 9.5% year over year in the third quarter. The company has stabilized its core innerwear business, with sales remaining roughly flat thanks to market share gains, but its activewear business remains a mess. Activewear sales, led by the Champion brand, tumbled 17% in the third quarter.

For the full year, revenue is expected to drop by about 9%. The company also expects to report a GAAP net loss, although free cash flow will look a lot better. Hanesbrands expects to produce free cash flow of about $450 million, although inventory reductions that aren’t necessarily repeatable will be a big source of that cash flow.

The pessimism surrounding Hanesbrands has reached extreme levels. The company’s market capitalization has declined to just $1.3 billion, compared to the $5.7 billion of revenue it expects to produce this year. Hanesbrands is reportedly considering offloading its Champion business, which generates around $2 billion in annual sales on its own. A sale would allow Hanesbrands to reduce its debt, which is becoming a problem as interest rates rise.

With Hanesbrands generating positive free cash flow and having access to total liquidity of $1.2 billion via $191 million of cash and $1 billion in available credit lines, the company should have no trouble muddling through the current environment. Historically, Hanesbrands has generated annual net income as high as $500 million, although that number has fluctuated over the years and will certainly be lower if the Champion brand is sold.

Given the rock-bottom market cap, a massive rally could be in the cards if Hanesbrands can return to profitability and convince investors that the worst is over.

Warner Bros. Discovery

Warner Bros. Discovery, formed by the merger of Discovery and Warner Media, is trying to figure out how to make its media assets work in the age of streaming. Most of the company’s adjusted EBITDA comes from its linear TV business, an uncomfortable position to be in as consumers increasingly turn to streaming services.

Warner Bros. Discovery owns HBO and the Max streaming service, which combines HBO content with Discovery content. The company has 95.1 million subscribers between HBO and its streaming services, so it’s already a big player. But the whole direct-to-consumer segment is barely profitable on an adjusted EBTIDA basis.

There’s also the studios segment, which produces films and video games and is not in the same existential crisis as the linear TV business. But linear TV still produced more than triple the adjusted EBITDA as the studios business during the third quarter.

Warner Bros. Discovery is in a race to make its non-linear TV businesses profitable enough to offset any declines in the linear TV business. The company has more than $45 billion in debt, which makes the task more difficult. Interest on that debt is on pace to top $2 billion this year, reducing the cash available to invest in content.

Despite these challenges, Warner Bros. Discovery is a media company that generates around $40 billion in revenue annually and that’s valued at just $26 billion. The company has good assets, it just needs to figure out how to effectively leverage them. It’s in the same boat in that regard as other legacy media companies, including Disney.

Warner Bros. Discovery is solidly cash flow positive, producing free cash flow of $2.85 billion through the first nine months of 2023, although lower spending due to recent labor strikes was part of the equation. Still, positive free cash flow allows the company to whittle down its debt over time.

Warner Bros. Discovery is a messy company with an uncertain future, but if it can boost its streaming profits enough to convince investors that the declining linear TV business is less of a big deal, a depressed valuation will set the stage for a huge stock recovery.