Investment Jungle

Investment Jungle reader Erik has requested that we have a look at American Eagle Outfitters Inc which trades on the NYSE under the symbol AEO. Has Erik found a Rule #1 stock? Let’s find out.

Company Profile:

From Yahoo Finance

American Eagle Outfitters, Inc., a retailing company, engages in the design, marketing, and sale of clothing in the United States and Canada. The company offers jeans and graphic T-shirts, as well as accessories, outerwear, footwear, basics, and swimwear primarily targeting 15 to 25 year-olds. It also provides dormwear and intimates, including bras, undies, camis, hoodies, robes, boxers, and sweats.

Market capitalization is $5.36B.

Fundamental Analysis:

Return on invested capital has met our Rule #1 10% minimum in each of the last 10 years. However, it has definitely not been consistent. Six of the last 10 years have had an ROIC of 23% or greater. Two years have returned an ROIC below 15%. The 5 year average ROIC is 21.5%. So there was a lull in 2002 and 2003, but management has been able to deliver those 23%+ ROIC over the last 3 years.

Return on equity trends downwards thanks to the returns posted in 2002 and 2003. The 10 year average ROE is 23.35% while the 5 year average ROE is 20.05%. Although decreasing, these are excellent numbers.

Equity growth rates have come down but seem to have stabilized. The 9 year rate is 31.81%. The 5 year rate drops to 23.46%. The 3 year rate comes in at 27.81% and last year’s equity growth rate remained stable at 23.01%. Fairly consistent growth over the last 10 years.

Earnings per share growth rates have been more erratic and display a different trend. The 9 year rate is 28.04%. The 5 year rate increases to 36.18%. The 3 year rate jumps to 65.53%! And last year’s EPS growth rate was a solid 34.92%.

Sales growth rates have remained relatively flat. The 9 year rate is 21.46%. The 5 year rate is 15.82%. The 3 year rate goes back up to 22.53% and last year’s rate remained stable at 21%.

And cash flow growth rates are even more stable with the 9 year, 5 year and 1 year rate all hovering at 30%.

The fundamentals look good to me. I would argue that this does meet our Rule #1 criteria for a wonderful stock. Let’s see if it is selling at an attractive price!

Stock Analysis:

To calculate the sticker price, I need a future EPS growth rate, a future P/E, the current EPS ($1.82) and a discount rate (15%).

My initial estimate for the future P/E is 13.85. That is the current P/E and is the most conservative P/E.

My initial estimate for the future EPS growth rate is 23.46% which represents the 5 year equity growth rate. Analysts have forecast 15% so I will use their more conservative value.

With this information, the sticker price works out to $25.20. And today’s current price? That’s right, $25.20! Mr. Market got this stock bang on!

Check my AEO stock analysis here.

Here is the 1 year stock price chart:

Conclusion:

The fundamentals make this a Rule #1 stock. And it is currently selling at its sticker price. Interesting to see how the market has repriced this stock from the $34 high back in early 2007 down to the sticker price.

Full Disclosure: I do not own shares in AEO.

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