American Eagle Drops on Q3 Earnings: I'm Holding On

American Eagle Outfitters (AEO) released 3Q earnings yesterday before the bell (see conference call transcript). They basically were inline with the estimates at $0.45/share, but after an initial spike at the open the stock fell a little over 5% to a low of $20.20. It has rebounded since and appears to have temporarily bottomed, but the long term trend still looks ugly on a technical basis as it has fallen through support and continued its long-term trend downward since last January when it set its all-time high at $34.80 (now nearly 42% from this level).

Needless to say, I'm still going to hold here, and will likely average down if the stock continues lower under selling pressure. It is still just way too cheap here at an 11.0 P/E and 1.5 P/S compared to its competitors, Abercrombie & Fitch (ANF) (15.5 P/E and 1.8 P/S), Guess? (GES) (22.6 P/E), and Urban Outfitters (URBN) (29.2 P/E and 2.8 P/S), especially when they continue to issue earnings and guidance that are inline with analyst estimates. This is definitely one of my favorite GARP (growth at a reasonable price) holdings in the fund.

AEO still has 5 yr projected growth rates around 15%, similar to ANF, yet its PEG is at 0.7 while ANF's is closer to 1.0. URBN is projected to grow at 23% for the next 5 years, putting its PEG close to 1.25. The rest of retail is at 1.0 on average.

AEO has no debt, while the industry average is around 25% debt-to-equity, and it has margins and ROE that have outperformed its industry and competitors over the last several years, and I see know glaring indication that this cannot continue to be the case.

This company still has a strong and growing brand, and while teen fashion trends can certainly be fickle, I still see kids wearing this stuff everywhere I go. I plan to stay long, despite the scary headlines about the consumer, and my 12 month price target at 15X 2008 earnings estimates (currently $1.87/share) is $28, which reflects 39% upside from current levels.

Disclosure: At the time of writing, I was long AEO with no position in ANF, GES, URBN