American Eagle Outfitters Valuation – November 2015 Update $AEO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – October 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how American Eagle Outfitters (AEO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): American Eagle Outfitters, Inc. is an apparel and accessories retailer. The Company offers clothing, accessories and personal care products. The Company operates under the American Eagle Outfitters and aerie by American Eagle Outfitters brands. The American Eagle Outfitters brand offers denims, pants, shorts, sweaters, fleece, outerwear, graphic t-shirts, footwear and accessories. The aerie brand is a collection of intimates and personal care products for women, such as bras and undies at the core, and offerings in sleep, swim and apparel. The Company offers its products online at and and at various international store locations managed by third-party operators. The Company operates around 1,000 retail stores in the United States and internationally, 955 American Eagle Outfitters stores, 101 aerie stand-alone stores and 99 third-party operated stores. The Company has stores in the United States, Canada, Mexico, Hong Kong, China and the United Kingdom.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of AEO – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $3,246,170,650 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.88 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -58.22% Fail
6. Moderate PEmg Ratio PEmg < 20 22.66 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.80 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.88 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

AEO value Chart November 2015

EPSmg $0.73
MG Growth Estimate -1.97%
MG Value $3.33
Opinion Overvalued
MG Value based on 3% Growth $10.59
MG Value based on 0% Growth $6.21
Market Implied Growth Rate 7.08%
Current Price $16.56
% of Intrinsic Value 497.69%

American Eagle Outfitters qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned by the low current ratio, the insufficient earnings growth over the last ten years, and the high PEmg and PB ratios, while the Enterprising Investor is only initially concerned by the lack of earnings growth over the last five years.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $0.84 in 2012 to an estimated $0.73 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 7.08% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on American Eagle Outfitters (AEO)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

AEO Charts November 2015

Net Current Asset Value (NCAV) $1.67
Graham Number $11.46
PEmg 22.66
Current Ratio 1.88
PB Ratio 2.80
Dividend Yield 3.02%
Number of Consecutive Years of Dividend Growth 3



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Most Recent Balance Sheet Figures

Total Current Assets $922,975,000
Total Current Liabilities $492,144,000
Long-Term Debt $0
Total Assets $1,760,209,000
Intangible Assets $60,160,000
Total Liabilities $594,531,000
Shares Outstanding (Diluted Average) 196,885,000

Earnings Per Share History

Next Fiscal Year Estimate $0.98
Jan15 $0.42
Jan14 $0.43
Jan13 $1.16
Jan12 $0.77
Jan11 $0.70
Jan10 $0.81
Jan09 $0.86
Jan08 $1.82
Jan07 $1.70
Jan06 $1.26
Jan05 $0.95
Jan04 $0.38
Jan03 $0.40
Jan02 $0.48
Jan01 $0.43
Jan00 $0.41
Jan99 $0.25
Jan98 $0.10
Jan97 $0.07
Jan96 -$0.01

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $0.73
Jan15 $0.64
Jan14 $0.75
Jan13 $0.90
Jan12 $0.84
Jan11 $0.98
Jan10 $1.17
Jan09 $1.34
Jan08 $1.46
Jan07 $1.17
Jan06 $0.83
Jan05 $0.59
Jan04 $0.41
Jan03 $0.42
Jan02 $0.40
Jan01 $0.32
Jan00 $0.23

Recommended Reading:

Other ModernGraham posts about the company

American Eagle Outfitters Analysis – Initial Coverage $AEO

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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