American Eagle Goes On Sale

Shares of young adult apparel chain American Eagle Outfitters (AEOS) are down $2 in after hours trading to $20.75 per share. The company reduced its fourth quarter earnings guidance tonight from 74 cents to 71 cents. That would put 2005 earnings at $1.90 for the year. A three-cent trimming of estimates does not warrant a nearly 10% dicing of the stock, mostly due to its already meager valuation.

If AEOS can hit $1.90 for the year ending in January, the shares will be trading at only 11 times trailing EPS in February should the current $20.75 price hold. For a company with a pristine balance sheet that can grow earnings 8%-10% annually for the next three to five years, that’s insanely cheap.

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8 Thoughts on “American Eagle Goes On Sale

  1. NO DooDahs on November 30, 2005 at 9:51 PM said:


    Well, I promised!

    You and I aren’t the only ones that think AEOS is on sale. Jay Schottenstein backed up the truck for $20 million worth last month. Booyah!

    Solid company, not a top 10 percenter but definitely top third. Reasonably cheap at these levels. Not as technically oversold as it was a month ago, but a significant long opportunity. Had a blip this year but overall a creator of value for shareholders.

    I think the market will sideways for the next week or so, so there will be opps for loading up. It doesn’t fit my strategy but I can agree it’s a good long.

  2. Chad Brand on December 1, 2005 at 8:37 AM said:

    I knew I could find one 🙂

    I think the stock will definitely hold the $20 support level, and it’s tested the 20-21 area a couple times. Should be good for a jump back up to 24-25 in early 2006.

  3. NO DooDahs on December 1, 2005 at 8:46 AM said:

    Since we’ve found some areas of agreement and disagreement in the past …

    Have you looked at GILD, KND, and SAFM? They may be small for your purposes, but these are my most recent acquisitions and I thought I’d solicite your opinions on them.

  4. NO DooDahs on December 1, 2005 at 8:47 AM said:

    OOPS, my bad, my kicking in is dyslexia.

    I’m short GILD. I meant to type GLDN as a long.

  5. Chad Brand on December 1, 2005 at 9:59 AM said:

    I owned Kindred for a while back in 2004 after it came up on some price-to-book screens I did. I would imagine it still possesses good numbers even though I haven’t watched it recently.

    SAFM is not an industry I would likely jump at.

    GLDN is a cheap stock, but a Russian company hasn’t ever really been on my priority list. Not much chance of meaningful multiple expansion, and just an overall lack of knowledge of their telecom markets.

  6. NO DooDahs on December 1, 2005 at 10:15 AM said:


    We have VERY different approaches.

    I am amazed at how much room there is in the market, though. Lots of different ways to make money, and even more ways to lose it!

    Those were the only three off of the “lucky thirteen screen” post on my blog that passed muster after I checked the financials and read the proxies and 10K/10Qs, BTW. I was long SAFM before that screening, and had considered some others in that space.

    You could say I’m short avian flu. LOL! Looking at the short action and price action of the various related stocks, most of the money is long avian flu, so this is a pretty contrarian bet.

  7. Hoopcity on December 8, 2005 at 6:19 PM said:


    For what it’s worth being around high school students all day has helped me make a couple of nice investments and miss a few. Last year at school I had not heard about but the students in the high school sure had. In fact, it took 2 months before the district finally banned myspace from the computer systems. I looked into investing in intermix but never did. However, I did get lucky with Apple as I saw the beginnings of student use and knowledge of their ipod device beginning to start. I would say last year only 5 percent of kids had ipods and that number is slowly growing but still not huge. It actually was not viewed as super cool yet. Now, I would say about 10 percent have them (mostly nanos..very hot) and about 50 percent want them for Christmas. This brings me to AEOS. Female students often spend time on the web visiting clothing web sites. I had not paid much attention to the clothing websites that the students were visiting, but after seeing this post I did. AEOS is one of the clothing websites that is very popular with the students. The girls all view this retailer as being in style. How this plays on the stock I have no idea. But, I do know that investing in companies that I can see firsthand that are creating a buzz in the teenage world have often been winners. After watching these kids not drinking coffee to within four years Starbucks being their beverage of choice helped me pull the trigger on that one. I think AEOS is definitely worth a look and may be pulling the trigger on this one. Thanks Chad for all of the have made me a much smarter investor. Keep up the good work.

  8. Chad Brand on December 9, 2005 at 7:34 AM said:

    Thanks very much for the kind words.

    You are correct that AEOS has been very popular within their target segment. In fact, that success has made management’s job a lot harder.

    After a record 2004, the company had very tough comparisons in 2005. However, they’ve done a great job and will grow EPS at least 25% this year.

    However, investors are worried that odds are decent they’ll slip up here pretty soon. Teen fashion is very fickle and AEOS has been pretty consistent over the last couple of years.

    I agree with concerns that there could be misteps in the future, as delivering each and every quarter in this industry is very difficult. However, given the company will continue to add stores and remains a customer favorite, I think general performance will be solid.

    Given their cash position, current buyback program, and business momentum, the stock should trade in the 10 to 15 times earnings range, the lower end when investors are nervous and the higher end when they are optimistic.

    Including net cash, we are below the low end of that range right now, even if we assume 2006 EPS will be flat with 2005. Hence my bullish stance on the stock at $20 per share. We could see $25 easily in 2006 as long as things go fairly well.

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