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American Eagle Outfitters: Large Upside Opportunity

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Exclusive Capital


  • Revenues have been substantially increasing in the past 2 years and it seems they will keep maintaining the trend.
  • AEO has no financial debt. Though, it still has to face strong contractual obligations.
  • The firm's dividend policy seems to be more conservative than in past years. This might help AEO’s free cash flow management.
  • Technical analysis converges with DCF results. This is not frequently seen and it really increases probabilities of a stock’s upside movement.
  • We found the stock to be highly undervalued by the market, showing a 72% upside opportunity for the next 12-18 months.

American Eagle Outfitters (NYSE: NYSE:AEO) is currently undervalued by the market. The company has really improved its revenue growth and operating efficiency. Nevertheless, it seems that the stock has been driven by momentum and the market hasn’t yet realized the firm's financial improvement. We applied a DCF valuation and a technical analysis to the firm. Both views drove us to the conclusion that AEO is an awesome pick for a portfolio.

Financial Performance

AEO’s financials have shown strong positive results. Revenues have showed an important upward trend and operating expense management has become more efficient. As a consequence, the firm has seen its operating margin increase, alongside with free cash flows expectations.

AEO seems resistant to global economic uncertainty and its inability to respond to consumers' changing preferences in shopping channels. AEO’s revenues fell 1.89% CAGR in the period 2012-2014. For the period 2013-2016, revenues increased 3.22% CAGR. The period 2013-2016 showed a 10% growth. 10% is considered to be a very high level if we take into account the industry’s slow-down expectations for the last 2 years.

The United States led revenues with 87% of sales, leaving the rest to other countries and the firm’s e-commerce business. “Women’s apparel and accessories” drove revenues with a 54% share, followed by “men’s apparel and accessories” with 35% and “Aerie” with 11%. Revenue improvement could be attributable to AEO’s investments in building technologies & digital capabilities in mobile technology, digital marketing, and desktop experiences.

In 2013, gross profit significantly fell due to high increases in the firm’s cost structure (2013 cost structure as a % of sales: ~66%). Since then, the firm’s cost structure fell to a solid 62% improved gross margin. In 2016, the firm’s gross margin was ~38%, very close to its 5Y average (36.75%). Gross profit improvement reflected better merchandise margins as a result of higher product markup levels and a flat cost

This article was written by

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Exclusive Capital is a financial and management service company focused on wide-ranging consultancy and corporate finance services. We offer high quality services, providing the necessary tools and advice to help firms and individuals take charge of their futures.  Our services include company and real estate valuation, financial structure analysis, wealth management, treasury management, debt profile analysis and general enquiries about personal stocks, bonds or portfolios. For long term investors, we do equity research analysis of firms to value companies and create optimized stock portfolios throughout Modern Portfolio Theory. For medium term investors, we price companies throughout financial multiples using relative valuation. We also practice technical analysis for those interested in short term returns.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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