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Why I think American Eagle Outfitters (AEO) will be bought out.

|Includes: American Eagle Outfitters, Inc. (AEO)
In the last 6-9 months Private Equity deals have been on the upswing & it’s not hard to see why. Tens of billions in cash, plentiful debt financing, and valuations far from excessive now is the time to buy.
American Eagle Outfitters (NYSE:AEO) is the ripest takeover candidate based on some simple valuations & market trends. The likelihood that a competitor could make a bid is minimal due to their small-medium size & lack of available cash.  Ironically what makes AEO so attractive is its pristine balance sheet (no debt) & cash on hand of $750 million (25% of market cap).
Relativity weak Grosse margins, stalled same-store sales low Price to Sales and Price to book valuations play right into the PE playbook of turning around stagnant companies.
With a Market Cap of $3 Billion even a 30% premium to share price as of this week would mean no more than a $4 Billion deal, hardly expensive when KKR is raising north of $10 Billion for the year . Also, an several compelling (non- valuation reasons) s for getting a deal done in the near term is the cheap debt still available this year. Assuming 2012 sees a higher interest rate environment (as most do) this should be a impetuous for getting a deal done soon. Also, I believe the current long time serving CEO declaring his intentions to step down signals willingness to the market of an intention to sell. The last point is all gut intuition.

In full disclosure I currently have a small long position in AEO.