ARO earned 13 cents in the first quarter, were expected to earn 4 cents this quarter, and expected $1.45 for the entire year. This quarter has been revised down to ZERO cents for this quarter and just $1.25 for this year FY2013, and next year FY2014 earnings have been revised down 15 cents to $1.50. However, with this new downward trojectory, it is very possible that repeating last year's 85 cents is very likely. If that occurs, next year's earnings expectations could be revised down again from $1.50 down closer to $1.00.
Therefore, if we give this company a P/E ratio of 12 (a very fair multiple for a company that expects no profitability for this quarter, and lowered expectations going forward) based on that range (85 cents to $1.25, the future value of this stock is $10.20 to $15.00.
This stock is NOT A BUY, since its potential downside is greater than potential upside right now ($15-$13.35=$1.65 of upside, and downside is $13.35-$10.2=$3.15 of downside).
A year later: I nailed it right on the head!... Now it is finally getting cheap. It is becoming a decent speculative play here. However, I believe there are other retailers (AEO, M, ANF) that have also fallen that are much safer, if you are looking for a safer investment with less speculative risk.
Nailed it again!... Not to toot my own horn, but it has been so much fun to call the earnings drop and the multiple contraction, coupled with my follow-up also being exactly right.
I am still bearish here; the only reason anyone would take a position here is in hoping for a buyout, but there are other much better retailers that could also be bought out for the same premium over the stock price, so there is no reason to buy shares here.
"With this new downward trojectory, it is very possible that repeating last year's 85 cents is very likely." It's looking more like 65 or 75 cents is more likely for earnings. With your P/E of 12, and adding the 75 cents on their balance sheet, we're looking at an $8.00 stock.
Six months later, this stock is still at the same price. Well, six months ago I titled my piece "ARO is Not Cheap Yet", and as the economy continues to get stronger and the other struggling retailers begin to turnaround their situations, maybe ARO is finally next. Although, this Christmas was quite poor.
you're funny, dude. do you just pull P/Es out of thin air, or do you reverse-engineer them to support the conclusion you want to reach?
dunno which is sillier, using EPS to rationalize a P/E multiple (hint: is BRKA entitled to a higher multiple than BRKB?), or forecasting earnings forecasts so you can have a smaller number to feed into your formula.
A year-and-a-half later.... Am I funny now?
Looking back, I was exactly right. It's as if I had a crystal ball. Actually, I may have been a little too conservative in my downward revisions, if anything.
Absolutely not. I used the Forbes article <http://www.forbes.com/sites/abrambrown/2012/08/02/aeropostale-stock-torn-apart-over-gloomy-guidance/?partner=yahootix> that laid out the lowered guidance by ARO's Management, and I used Standard & Poor's Capital IQ report to look back at historical earnings. Likewise, I used both S&P's expectations based on the lowered guidance from Management and I extrapolated out to last year's earnings on the likely potential of further misses and/or reduced guidance.
With regards to the P/E ratios, yes, the multiple of 12 was mine. Here's why: American Eagle is trading at 20.6 times trailing earnings (backing out the cash), but unlike ARO, AEO upped guidance while ARO cut guidance. Abercrombie and Fitch is trading at 23.2 times trailing earnings (minus cash). Guess is trading at a trailing multiple of 9.4 (backing out the cash). Also, unlike ARO, those three companies pay a dividend every quarter. So I think a multiple of 12 is very fair for a teen retailer that is expecting no profit this quarter.
Finally, keep in mind that it is very rare that a company's management lowers guidance going into one quarter's report, only to turn around and beat expectations or upgrade guidance the next quarter.
Let's assume your downside potential is accurate (85 cents earnings x 12 PE = $10.20).
The more accurate upside would be to assume the forward earnings are per the forecast of $1.50. $1.5 earnings x 12 PE = $18.00).
Therefore, from the current price of about $13, the downside is negative $3 and the upside is positive $5. Not exactly a screaming buy, but better than you stated.
The bigger upside to ARO is the clean balance sheet, positive brand recognition, and small market cap that all make ARO a buyout target.