Over the past 10 years, the eagle has soared into the stratosphere. From about 1 dollar a share in 1997, American Eagle's stock price rose to over 30 in 2007. Like poor Icarus, who flew too close to the sun and ended up in the Icarian Sea, American Eagle's wings are now damaged, and its new flight pattern is unfortunately down.
American Eagle's new same stores sales were just released. Down 12% from last March. Total sales were down 2%. Ouch! But wait, the numbers get even worst. AEO is now lowering its earnings guidance to .18 - .20 cent a share for the first quarter of 2008. This is about 50% less than last year. Also since last March, AEO has bought back about 8% of its outstanding shares, so actual net earnings will be down about 55% from last years Q1. Margins are obviously getting squeezed big time.
What should also concern investors is that just one month ago, AEO published an estimate of .26 cent a share for the first quarter. This new estimate is a 27% reduction from AEO's estimate form just 30 days ago. This calls into question whether upper management really knows what is happening on the ground.
This article from just a few day ago presents the bull case for American Eagle. The author did a great job of showing how well AEO has done in the past. The data shows AEO's remarkable growth from 1998 to 2006. But as stated above, American Eagle's stocks price had risen 30x during that time as well.
But one can not ignore the last 4 quarters when trying to predict future cash flows IMHO. Here is a chart of what I call earnings velocity. This is the past 4 quarters of AEO's net earnings year on year growth rates. I am including AEO's most recent estimate for Q1. [more]
Before I get blogged out of existence with hate posts, Please allow me to continue. First let me state - I use energy! I drive a diesel car, I use electricity to heat and cool my house, I eat food, I invest in oil, gas, and coal stocks - I like energy.
Energy companies are not good, bad or ugly. Attaching human adjectives to an equity is just plain dumb. Peabody Energy Corp, and ConocoPhillips are no better or worst than Apple, or Goggle. These firms are all the same, with thousand of great employees trying to maximize shareholder wealth.
As much as I like energy - I hate pollution. The US contains 4% of the world population, but produces about 25% of the carbon dioxide and other polluting emissions. Why is this?
My argument is fairly simple - The US does not allow free market economics in the energy sector. There are two important factors.
1) Cheap or free inputs. Many energy firms are VAR's(value added resellers). Where does oil, gas, and coal come from in the US? Public land. We all own these natural resources. Do these energy firms bid on the inputs they need to make profits? Can I bid for some natty gas? Apple needs memory chips for their consumer devices, and they pay the current market prices for these inputs. Does Peabody Energy pay current market prices for its input - coal? NO.
2) Negative externalities and the public good. Public goods would be public health, clean environment, roads, national security, etc....Externalities happen when one firms actions affect another firms or persons well-being or profits. Unless firms pay for the pollution they produce - no free market.
How does the US move towards free markets in the energy sector? By addressing the two above issues, we would have more open, free and fair energy markets.
The most efficient way the solve the pollution issue is to install per unit pollution taxes.
As a start, the US should tax the following pollutants:
This would be a consumer tax. Higher gas prices at the pump, higher electric bills, etc. This is the only way to encourage conservation, reduce our dependence on foreign energy sources, reduce pollution, and enable fair energy competition.
I know the fear mongers will scream - This will kill the US economy!!!! We will all die!!! I wont be able to drive my V-16 12,000 lbs behemoth from my McMansion to McDonald's!!! Calm down, breath deep, and try and think.
Here are the facts. There is no correlation between large increases in gas prices and the economy. Between 2004 and mid 2005, US gasoline prices more than doubled! During this time, US GDP rose on average 6.3% well above its long term average.
This new tax shift would actually lower taxes on working Americans. How can this be you ask? For every 1 dollar of consumption tax received, the US could lower the income tax by $1.30 - this is my estimate. The beauty of consumption taxes vs income taxes is three fold.
1) Worker participation rate:
From a high of about 67.5, we are now falling to 65. This dynamic will continue due to the retirement of the baby boomers, and global outsourcing. This means that 35% of adults are not paying w-2, and income taxes. Pollution taxes would broaden the tax base from 65% to close to 100%.
Our current system is one of volunteering tax amounts to the government, then having the US verifying if these amounts are correct. If the government disagrees, legal procedures may follow. Long negotiation, and settlement process to finalize the amount. Usually the US will spend more in expenses during this process than it finally collects. Also think of all the lost productivity of individuals preparing these tax returns.
3) Underground economy and tax avoidance:. This has been underestimate for decades in my opinion. 20% of GDP is my current estimate. Every illegal alien, drug dealer, prostitute, independent contractor, and tax cheater will now finally pay taxes.
As an economist, I firmly believe that the proposed pollution taxes would create an enormous number of new high paying US based energy jobs, and increase GDP. Currently, venture capital is not funding alternative energy concepts, due to the uncertain, and low future cash flows of these unproven technologies. If all the polluting competing energy producers are taxed, then these clean ideas can finally charge a higher fair price for their products.
This would be a good start towards replacing the income tax with consumption taxes. The regressive nature of consumption taxes could be avoided by eliminated all w-2 taxes starting from the low end, then moving up.
I am hoping to start an intelligent dialog about this issue on CAPS. I value the thinkers of this community.