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American Eagle Outfitters (AEO): A 'Strong Buy' Stock for the New Year

In most American malls you will find stores belonging to American Eagle Outfitters, Inc. (AEOResearch Report). The company’s target audience is the university crowd, although customer demographics do include adults in the 30 to 40 age brackets, and teens. AEO operates over 900 stores in the US, and over 200 more internationally.

This company is generally profitable, and the Q3 earnings report earlier this month reflects that. Earnings per share, $0.48, beat the estimate by a single cent, and were 11 cents higher than last year’s Q3. The bad news was, quarterly revenues just missed the estimate. The $1 billion in revenue was a 3% miss, and lead to a fall-off in share price after the report’s release.

Even with that fall-off in share price, AEO has managed to outperform the overall markets. The S&P 500 is down 12.7% year to date, while AEO shares are only down 6%. The combination of strong earnings and a stock that outperforms the market should give American Eagle a firm footing heading into 2019.

Word on the Street: Extremely undervalued

While AEO shares have slipped in the markets, financial analysts have kept their optimism on this stock. Starting on Dec 11, the day after the Q3 report, AEO received 7 ‘buy’ ratings in a row.

The first of those ratings came from Loop Capital’s Laura Champine (Track Record & Ratings), who gave AEO a $27 price target, and 54% upside, to go with her ‘buy’ rating.

She singles out the eye-catching success of the company’s Aerie lingerie brand. In her comments, Champine points out “32% comp growth in the company's Aerie brands, exceeding the American Eagle core brand growth of 5%. She adds that Aerie brand comps have come in at over 20% or more for three years running.” She adds that AEO is “inexpensive” at its current valuation.

UBS analyst Jay Sole (Track Record & Ratings) was next to weigh in, with a $31 price target. Noting the same sales growth Champine pointed out, Sole also states his belief that American Eagle may triple its sales in the coming years. He concludes, “With the stock trading at just 11.5 times fiscal 2019 earnings estimates, AEO is an attractive opportunity to buy a growth stock at a value multiple.” Sole’s price target suggests a 77% upside to this stock.

The most recent analyst to look at AEO is Paul Lejuez (Track Record & Ratings), of Citigroup. Like Champine, he gives American Eagle a $27 price target, and like Sole he sees the stock as “extremely undervalued at current levels.”

AEO currently holds a ‘Strong Buy’ analyst consensus, based on 8 ‘buy’ ratings and no ‘holds’ or ‘sells.’ The stock has as 49% upside potential, with a $26 price target and a $17.50 current share price.

A Dividend that Delivers

One final point, that the recent reviewers did not touch on, is AEO’s reliable dividend performance. The company has paid out regularly, every quarter, for the last eight years. The yield has ranged from 2.1 to 3.8%, which is hardly spectacular, but the payout has increased steadily from 11 cents per share to the most recent payment of 13.75 cents. The next dividend, scheduled for Dec 28, will be another 13.75 cents per share, making the annualized payment 55 cents for a 3.14% yield.

While this doesn’t make AEO a dividend king, the reliability of the payout certainly puts this stock among the dividend nobility. It’s a factor that investors should take into account, along with the low cost of entry and the upbeat outlook.

Author: Michael Marcus

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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