Apparel Stocks

American Eagle Outfitters Inc Valuation – May 2018 $AEO

Company Profile (excerpt from Reuters): American Eagle Outfitters, Inc. (AEO Inc.), incorporated on January 26, 1972, is a multi-brand specialty retailer. The Company offers a range of apparel and accessories for men and women under the American Eagle Outfitters Brand (AEO 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. As of January 28, 2017, the Company operated over 1,000 retail stores and online at ae.com and aerie.com in the United States and internationally. Its company-owned retail stores are located in shopping malls, lifestyle centers and street locations in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AEO – May 2018

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 $3,848,209,366 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.00 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 59.65% Pass
6. Moderate PEmg Ratio PEmg < 20 19.44 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.25 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 2.00 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

EPSmg $1.16
MG Growth Estimate 12.34%
MG Value $38.47
Opinion Undervalued
MG Grade B
MG Value based on 3% Growth $16.81
MG Value based on 0% Growth $9.85
Market Implied Growth Rate 5.47%
Current Price $22.54
% of Intrinsic Value 58.59%

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, high PB ratio. 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 Undervalued after growing its EPSmg (normalized earnings) from $0.64 in 2015 to an estimated $1.16 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.47% 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 above the price.

At the time of valuation, further research into American Eagle Outfitters revealed the company was trading above its Graham Number of $14.5. The company pays a dividend of $0.5 per share, for a yield of 2.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 19.44, which was below the industry average of 49.11, 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 $2.22.

American Eagle Outfitters performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $2.22
Graham Number $14.50
PEmg 19.44
Current Ratio 2.00
PB Ratio 3.25
Current Dividend $0.50
Dividend Yield 2.22%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 1/1/2018
Total Current Assets $968,530,000
Total Current Liabilities $485,221,000
Long-Term Debt $0
Total Assets $1,816,313,000
Intangible Assets $61,736,000
Total Liabilities $569,522,000
Shares Outstanding (Diluted Average) 179,844,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.35
Jan2018 $1.13
Jan2017 $1.16
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 $1.26
Jan2005 $0.95
Jan2004 $0.38
Jan2003 $0.40
Jan2002 $0.48
Jan2001 $0.43
Jan2000 $0.41
Jan1999 $0.25

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.16
Jan2018 $0.99
Jan2017 $0.90
Jan2016 $0.77
Jan2015 $0.64
Jan2014 $0.75
Jan2013 $0.90
Jan2012 $0.84
Jan2011 $0.98
Jan2010 $1.17
Jan2009 $1.34
Jan2008 $1.46
Jan2007 $1.17
Jan2006 $0.83
Jan2005 $0.59
Jan2004 $0.41
Jan2003 $0.42

Recommended Reading:

Other ModernGraham posts about the company

American Eagle Outfitters Valuation – January 2017 $AEO
American Eagle Outfitters Valuation – August 2016 $AEO
American Eagle Outfitters Valuation – February 2016 $AEO
American Eagle Outfitters Valuation – November 2015 Update $AEO
American Eagle Outfitters Analysis – Initial Coverage $AEO

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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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