A.G. Kicks Abercrombie While It’s Down

Despite today’s downgrade from “buy” to “hold” by A.G. Edwards (point “B”), I still view the recent weakness in shares of Abercrombie and Fitch (ANF) as an excellent entry point for investors. As you can see from the chart below, A.G. has hardly been adept at calling the direction of ANF stock. They put the “buy” recommendation on it in June 2005 (point “A”) and within weeks the shares began a freefall from over $70 to under $45 in less than two months. If I’m right that Abercrombie will rebound later this year, this will be just another example of analysts urging clients to buy high and sell low.

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2 Thoughts on “A.G. Kicks Abercrombie While It’s Down

  1. Andy Kern on March 6, 2006 at 1:54 PM said:

    This stock has always seemed underappreciated to me. I mean, it has consistently grown revenues in excess of 20% for the last ten years and has no debt, yet currently trades at only 16X earnings. They also seem to have been repurchasing shares pretty regularly. Your thoughts?

  2. Chad Brand on March 6, 2006 at 2:13 PM said:

    The teen retail segment is always a volatile one. In fact, ANF always used to trade at a discount to the retail sector and the market. It routinely only fetched 10 or 12 times forward earnings.

    However, as the company continued to expand its store offerings (Hollister, etc) it became apparent that they could grow double digits for years to come. The market reacted, and the stock fetched a higher multiple (16x-18x) in recent memory.

    Now we have a soft month for same-store sales and the thing gets crushed again. There were a lot of momentum players in it and they have bailed.

    Despite the worries in recent days, ANF can still grow 10 to 15 percent per year for many years to come. Their lack of debt and $5 in cash will allow for stock buybacks, which will help them rebound from a lackluster month here and there.

    I don’t think the current EPS estimates (before the February numbers came out) of $4.30 for 2006 and $5 for 2007 are unattainable due to a disappointing February.

    At $56 per share, ANF is trading at an enterprise value to forward earnings ratio of only 12x. We’ve seen think happen before, and I think it is yet another gift for patient investors who aren’t focused on last month’s sales numbers (which, by the way, were UP more than 5 percent).

    A share price of $70 by year-end is reasonable, in my view.

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