The Bull Case for American Eagle Outfitters (AEOS)

In the annual Barron's Roundtable (sub. req.) of investment pros, Delphi Management's Scott Black laid out his case for American Eagle Outfitters (AEOS) as a buy at this time:

We try to buy deep value, high return on equity, low P/E and strong free cash flow. It doesn't matter whether the broad market is high, low or medium.... American Eagle Outfitters appeals to the 15-to-25-year-old. The company has consistently done 25% to 30% on book, with no debt. Last year it generated over $180 million in free cash.

The stock is at 24, and the market cap is $3.76 billion. It pays 30 cents a share in dividends. American Eagle has 868 stores, including 71 in Canada. It expects to add 40 to 50 new stores a year. The average store is about 5,800 square feet and does $510 per square foot, which is pretty good. Their December comps [same-store sales] were up 9.8%.

In price positioning, they are below Abercrombie & Fitch (ANF), but higher than Aeropostale (ARO). They'll probably finish this year with $2.28 billion in revenue, a 20% increase. Operating margins will be about 19.3%, and net earnings will be $320 million, or $2.05 a share.

The stock is selling at 11.8 times earnings. Return on capital is 25%; there is no debt. When the stock got down to $21-$22, the founder was buying. They're also coming out with a new concept for people 25 to 35... If they earn a little over $2, there's no reason the stock doesn't go to 35 or 40.

AEOS 1-yr chart:

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