Apparel Stocks

American Eagle Outfitters Valuation – August 2016 $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 Companies Benjamin Graham Would Invest In Today – July 2016.  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. (AEO Inc.) is a specialty retailer, operating over 1,000 retail stores and online at ae.com and aerie.com in the United States and internationally. The Company operates in the segment of American Eagle Outfitters Brand (AEO Brand) retail stores, Aerie by American Eagle Outfitters retail stores and AEO Direct. It offers an assortment of apparel and accessories for men and women under the American Eagle Outfitters brand, and intimates, apparel and personal care products for women under the Aerie brand. AEO Inc. operates stores in the United States, Canada, Mexico, Hong Kong, China and the United Kingdom. It also has license agreements with third parties to operate American Eagle Outfitters and Aerie stores throughout Asia, Europe, Latin America and the Middle East. It operates over 950 American Eagle Outfitters stores and approximately 100 Aerie stand-alone stores. The Company has store base in approximately 140 locations in over 20 countries.

AEO Chart

AEO data by YCharts

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AEO – August 2016

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 $3,357,660,984 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.74 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 -22.06% Fail
6. Moderate PEmg Ratio PEmg < 20 20.19 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.12 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 1.74 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 Pass

Stage 2: Determination of Intrinsic Value

AEO value chart August 2016

EPSmg $0.91
MG Growth Estimate 0.23%
MG Value $8.17
Opinion Overvalued
MG Grade C+
MG Value based on 3% Growth $13.21
MG Value based on 0% Growth $7.75
Market Implied Growth Rate 5.85%
Current Price $18.40
% of Intrinsic Value 225.13%

American Eagle Outfitters is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.9 in 2013 to an estimated $0.91 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.85% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into American Eagle Outfitters revealed the company was trading above its Graham Number of $12.63. The company pays a dividend of $0.5 per share, for a yield of 2.7%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 20.19, which was below the industry average of 26.26, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $1.15.

American Eagle Outfitters receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

AEO charts August 2016

Net Current Asset Value (NCAV) $1.15
Graham Number $12.63
PEmg 20.19
Current Ratio 1.74
PB Ratio 3.12
Current Dividend $0.50
Dividend Yield 2.72%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 4/1/2016
Total Current Assets $729,327,000
Total Current Liabilities $418,486,000
Long-Term Debt $0
Total Assets $1,596,296,000
Intangible Assets $68,952,000
Total Liabilities $518,988,000
Shares Outstanding (Diluted Average) 182,927,000

Earnings Per Share History

Next Fiscal Year Estimate $1.19
Jan2016 $1.11
Jan2015 $0.42
Jan2014 $0.43
Jan2013 $1.16
Jan2012 $0.77
Jan2011 $0.70
Jan2010 $0.81
Jan2009 $0.86
Jan2008 $1.82
Jan2007 $1.70
Jan2006 $1.89
Jan2005 $1.42
Jan2004 $0.28
Jan2003 $1.22
Jan2002 $1.43
Jan2001 $1.30
Jan2000 $1.86
Jan1999 $1.13
Jan1998 $0.10
Jan1997 $0.39

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $0.91
Jan2016 $0.77
Jan2015 $0.64
Jan2014 $0.75
Jan2013 $0.90
Jan2012 $0.84
Jan2011 $0.98
Jan2010 $1.22
Jan2009 $1.46
Jan2008 $1.65
Jan2007 $1.47
Jan2006 $1.32
Jan2005 $1.07
Jan2004 $1.00
Jan2003 $1.37
Jan2002 $1.35
Jan2001 $1.19

Recommended Reading:

Other ModernGraham posts about the company

American Eagle Outfitters Valuation – February 2016 $AEO
American Eagle Outfitters Valuation – November 2015 Update $AEO
American Eagle Outfitters Valuation – November 2015 Update $AEO
American Eagle Outfitters Analysis – Initial Coverage $AEO

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Nike Inc. Valuation – May 2016 $NKE
Wolverine World Wide Inc Valuation – May 2016 $WWW
Ralph Lauren Corp Stock Valuation – February 2016 $RL
Gap Inc Valuation – February 2016 $GPS
American Eagle Outfitters Valuation – February 2016 $AEO

Disclaimer:

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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