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3 Arguments for American Eagle Outfitters, Inc.'s (NYSE:AEO) Undervaluation

Stjepan Kalinic
·4 min read

This article first appeared on Simply Wall St News.

By late 2020, American Eagle Outfitters, Inc.'s (NYSE: AEO) recovery has been astonishing, as the stock surged to new all-time highs.

Yet, it gave back all the last year's gains, declining almost 50% from the peak. The stock is now in value territory with a reinstated dividend and healthy forecasts.

Check out our latest analysis for American Eagle Outfitters

Q4 Earnings Results

  • Non-GAAP EPS: US$0.35 (in-line with expectations)

  • Revenue: US$1.51b (in-line with expectations)

  • Revenue growth: +17.1% Y/Y

  • FY 2022 guidance: US$550-600m, vs. US$603m in 2021

The softer guidance results from the stimulus unwinding and continued freight pressure that is expected for the first half of the year.

Reflecting on the earnings, CEO Jay Schottenstein stated that the revenue growth was +16% compared to the pre-pandemic 2019. Furthermore, 2021 was the best net-profit result since 2007. It would have been an all-time high profit if it was not for higher freight costs and supply chain pressures.

Mr.Schottenstein set the new target at US$800m in operating profit and a 13.5% operating margin.

Entering the Value Territory

The stock is now in the value region, considering the price-to-earnings (P/E) ratio of 9.6x. Almost half of all companies in the United States have P/E ratios greater than 17x, and even P/E's higher than 33x is not unusual. However, the P/E might be low for a reason, and it requires further investigation to determine if it's justified.

American Eagle Outfitters could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lackluster earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favor.

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Keen to find out how analysts think American Eagle Outfitters' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For American Eagle Outfitters?

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow EPS by an impressive 40% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been strong for the company. While the previous few years have been unusual, the comparisons with the pre-pandemic 2019 still give a good broader picture.

According to the eleven analysts following the company, looking ahead now, EPS is anticipated to climb by 10% during the coming year. With the market predicted to deliver 9.0% growth, the company is positioned for a comparable earnings result.

With this information, we find it odd that American Eagle Outfitters is trading at a P/E lower than the market. Apparently, some shareholders are doubtful of the forecasts and accept lower selling prices.

3 Main Arguments for Good Value

  • Above-average dividend: AOE's dividend has been reinstated, and it now yields 3.38%, which is well-above industry's average of 2.0%. Furthermore, the current payout is just 22% which leaves a lot of maneuvering space for dividend hikes in the future.

  • Healthy balance sheet: With more cash than debt, we can say that the company has a strong balance sheet. Even after the acquisition of Quiet Logistics and other strategic investments, the company still has plenty of cash at hand and a low debt-to-equity ratio.

  • Optimistic growth rate: Considering the analyst's projections, annual earnings growth is set to outperform the broad market slightly.

While the current outlook seems optimistic, some unobserved threats to earnings could prevent the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Yet, this doesn't mean that AEO is a perfect stock - we also found 4 warning signs for American Eagle Outfitters (1 shouldn't be ignored!) that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/Es below 20x.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.