American Eagle Outstanding (AEO) Valuation

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Seems like the current pull back clipped the wings of American Eagle. At its current price of $17.17 is it a superb deal or a value trap?

Recent News

On March 6th, AEO dropped 15%. Panic had set into the market. The reason? Same store sales fell 4% in February. Head over to any finance sites and people are asking about the drop and their panic is evident. Was I panicking? Sure was. I was panicking with excitement at the chance of picking up 50c dollars.

I’ll try going over a few things here.

Insider Transactions

Head over to the SEC website (direct link to AEO filings) and view the form 4’s. Form 4 is a filing that must be submitted to the SEC for insider transactions.

From the latest filings, we see that a little over 1 million shares were exercised or purchased (I believe they are stock options) at $21.28. None of which have been sold yet.

This tells me a couple of things:
  1. Insiders believe the price of $21.28 is underpricing the value.
  2. Insders are confident in their company and their business prospects.
The Industry

Frankly, retail and teen fashion are horrible industries. Retail is cyclical, fashion is just as cyclical and seasonal. One day the shirt you’re wearing is considered hot and the next, it’s out dated. Combine the two and you are looking at a difficult industry with little moat between competitors. However, make your mark, get brand awareness and apply some competitive advantage and you may just have what it takes for great growth in a highly competitive but profitable industry.

The Brand

On Feb 22, in a recent teen survey by Pali Research showed that “hands down” AEO won as the favorite brand and most dollars spent.

Currently, AEO are running the American Eagle, Aerie, Martin + Osa, 77kids.
Martin + Osa seems to be finding difficulty in engraving its place in retail but Aerie is continuing to increase sales along with America Eagle. The real important question you have to ask yourself is “do you believe that the company will grow in the next 5 years or so?”

The conclusion to the question above will eventually dictate your decision on AEO as a potential investment. Remember what Buffett said.

Growth and value are joined at the hip – Warren Buffett

The Management

This section I must leave to individuals to decide upon the competency of management. Don’t let my thoughts cloud or influence yours. There are many hints from annual reports and other publications that you should read for yourself as well seeing this interview from CNBC.
James O’Donnell the CEO speaks candidly in this interview, something that I always look for because it portrays the CEO as focusing on the business, operations and future growth, rather than focusing on reporting lovable earnings for the short term.
Part 1of video
Part 2 of video

The Intrinsic Value

AEO has been able to steadily increase its earnings, owner earnings for the past 10 years without any drastic volatility. I like to invest in companies where they have consistent growth rather than huge ups and downs. AEO fits that filter.

It seems like AEO has been able to grow FCF at 35% for the past 10 years. They have no long term debt, a nice lump of cash in their balance sheet and for every $1 invested into the company, they were able to generate $0.17 with it. Can AEO do this for the next 5 or 10 years? I don’t know. But by being reasonable, I do have an idea of a potential growth rate.

Can AEO keep up the 35% FCF growth for the next 5-10 years? I doubt it. Assuming that the company is able to grow at 15% for 3 years, slowed down 10% in years 4-7, slowed down another 10% in years 8-10 followed by 5% growth in years 11-20, the intrinsic value comes out to $37.37. 50% margin of safety applied for a small, fast growing company in a competitive industry gives a target buy price of $18.69.

Can the price go lower? Why not? The lowest any company can go is $0, but considering current economic situations, uncertainty and fear in the market, I’m sure there is a good chance the price may drop. But I see a huge gain compared to a short term possibility of 10% loss.

Price is what you pay, value is what you get – Warren Buffett

In answer to the first question. Is it a superb deal or a value trap? My analysis and research reveals that it is a deal. But then again, I’m not always right. Let me know what you think.


I own shares of American Eagle Outstanding.

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5 responses to “American Eagle Outstanding (AEO) Valuation”

  1. Amit. D says:

    Hey thanks alot for your insights, your an awesome writer! Personally, I would only invest in this company by treating it as the “risky” stocks in my portfolio. We cannot deny that future profitability highly depends on what macroeconomic situation the company has faced in the past(there’s no insurance that they will perform 50% as good as they did in the past). This is why I’d only buy it with a MOS 50% as well but I would treat it as a risky stock with great value and potential if I’m willing to use the “3 year rule” and dump it in the future if there’s clear indication that the company is facing the need to restructure itself for business viability(or other numerous reasons).

  2. Jae Jun says:

    Hi Amit,
    AEO certainly isnt for everybody. A person I know shys away from all retail businesses because he doesnt like the volatility. I guess it depends on how you think of volatility. If volatility = beta = risk, I’m probably one of the most riskiest people out there! 🙂
    Regarding macroeconomics, it just becomes noise to me. I won’t state why because I’ll probably just start rambling on.
    Just one point about AEO. They aren’t in any form of restructuring or reorganising. Rather, they are launching other brands, trying things out for future growth and brand awareness. Nothing really has changed much before the markets dipped. I just give thanks to the market for offering me 50c $1. 🙂
    Thanks for taking the time to comment.

  3. Matty M says:

    I been buying AEO since the beggining of the year. Today it dropped in the morning to the high 13’s when I picked up some more. Only trading at 8 times earnings this is a steal, this should be a big winner in the future, thanks for the analysis.

  4. Jae Jun says:

    Hi Matty M,

    AEO hasn’t really changed its business in any way and the fundamentals certainly have not deterioated. The new children’s line is eating up capital and M+O is beginning to gain ground which all points to a future growth strategy. They have plenty of cash and their business has proven it can be profitable.

    I would like more money to average down further 🙂

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