U.S. Markets closed

Is American Eagle Outfitters, Inc. (NYSE:AEO) Potentially Undervalued?

Simply Wall St

American Eagle Outfitters, Inc. (NYSE:AEO), which is in the specialty retail business, and is based in United States, received a lot of attention from a substantial price movement on the NYSE over the last few months, increasing to US$16.66 at one point, and dropping to the lows of US$14.13. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether American Eagle Outfitters's current trading price of US$14.15 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at American Eagle Outfitters’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

See our latest analysis for American Eagle Outfitters

What is American Eagle Outfitters worth?

The stock seems fairly valued at the moment according to my valuation model. It’s trading around 0.5% below my intrinsic value, which means if you buy American Eagle Outfitters today, you’d be paying a fair price for it. And if you believe that the stock is really worth $14.22, then there’s not much of an upside to gain from mispricing. What's more, American Eagle Outfitters’s share price may be more stable over time (relative to the market), as indicated by its low beta.

What does the future of American Eagle Outfitters look like?

NYSE:AEO Past and Future Earnings, January 11th 2020

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with a negative profit growth of -17% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for American Eagle Outfitters. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? AEO seems fairly priced right now, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on the stock, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on AEO for a while, now may not be the most advantageous time to buy, given it is trading around its fair value. The price seems to be trading at fair value, which means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help gel your views on AEO should the price fluctuate below its true value.

Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on American Eagle Outfitters. You can find everything you need to know about American Eagle Outfitters in the latest infographic research report. If you are no longer interested in American Eagle Outfitters, you can use our free platform to see my list of over 50 other stocks with a high growth potential.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.