The stock of American Eagle Outfitters Inc (AEO, Financial) has recently gained 4.34%, with a 3-month gain of 33.2%. With an Earnings Per Share (EPS) (EPS) of 1.04, the question arises: is the stock fairly valued? This article seeks to answer this question by conducting a comprehensive valuation analysis of American Eagle Outfitters. We invite you to delve into the following analysis to gain a deeper understanding of the company's value.
Company Introduction
American Eagle Outfitters Inc is a renowned apparel and accessory retailer with company stores in the U.S., Canada, Mexico, and Hong Kong. The company, which also has an online business that ships worldwide, operates in two segments: American Eagle and Aerie. The majority of its revenue comes from its primary brand, American Eagle. A comparison between the stock price and the GF Value reveals that the stock is fairly valued at its current price of $16.36 per share and a market cap of $3.20 billion.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Given that American Eagle Outfitters is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. American Eagle Outfitters has a cash-to-debt ratio of 0.14, which ranks worse than 75.02% of 1101 companies in the Retail - Cyclical industry. The overall financial strength of American Eagle Outfitters is 7 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. American Eagle Outfitters has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $5 billion and Earnings Per Share (EPS) of $1.04. Its operating margin of 6.43% better than 65.65% of 1115 companies in the Retail - Cyclical industry. Overall, GuruFocus ranks American Eagle Outfitters's profitability as fair.
Growth is probably the most important factor in the valuation of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of American Eagle Outfitters is -1.2%, which ranks worse than 63.65% of 1048 companies in the Retail - Cyclical industry. The 3-year average EBITDA growth rate is -12%, which ranks worse than 82.68% of 895 companies in the Retail - Cyclical industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, American Eagle Outfitters's ROIC was 7.53, while its WACC came in at 9.43.
Conclusion
In short, the stock of American Eagle Outfitters (AEO, Financial) is believed to be fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 82.68% of 895 companies in the Retail - Cyclical industry. To learn more about American Eagle Outfitters stock, you can check out its 30-Year Financials here.
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