American Eagle Outfitters (NYSE:AEO)

I calculate an EV/FCF ratio of 10.8 for this stock, with is pegged for 12% growth on Wall Street and pays a 2.6% dividend. That's a good bargain in any market.

I believe that Amercan Eagle is selling for a nice discount. The price is $11.50, which represents a PE ratio of 10.65. I purchased shares in 2011 for a trade on 9/14/2011. The price was $11.01 and the PE ratio was 13.11. The PE is better now. They were paying $0.44 per year in dividends in 2011: today, they are paying $0.50 per share, which represents a dividend yield of 4.34%. Even that is better than the 4% dividend yield in 2011. I got a bit lazy on my sale, but just 2 quarters later one could have sold shares at $21.13 or a 92% return in a few quarters. A person more alert than I could have gotten a quick nice return. This looks like a repeat chance to get another nice return.

Are the risks higher?

Yes, ARO will likely continue to liquidate inventory, which could hurt sales for a while. And they face the same risk as all apparel retailers - competition and changing fashion whims. But there are plenty of good things too.

TTM cash flow today is $169.206 million or $0.93 per share. Back in the second quarter of 2011, they were making $184.8 million or $0.94 per share, a bit better. Today, they have reduced the share count, but they have less cash today too. Today, they have $225.197 million in cash and no debt, back in 2011; they had $515 million in cash and no debt. Those two things have not improved, but they are still debt free and they still generate strong streams of cash flow.

Last year, in 2016, they were running hot. They nearly lost a competitor in ARO. ARO liquidated many of their stores, but was bailed out by a private company and some of those stores will continue to operate. Those that closed liquidated inventory and where they did this in areas where there were American Eagle stores, these discounted prices hurt AEO. But that won’t last forever. I expect by the holidays, the stock price will be higher. And while investors wait they will be getting a 4.34% dividend yield. Cash flow yield currently is 8.1%, which is really very nice.

Aerie comparable store sales were up 17% in the fourth quarter and reported 25% comparable store sales for the first quarter of 2017. What? Aerie has 102 stores up from 97 stores. The success of the Aerie brand, though coming from a much smaller base of sales, alone would be enough for me to ride out the liquidations that are affecting their main American Eagle brand. Aerie sales are about 11% of total sales in 2016, so about $397 million a year and growing fast. AEO believes they will become a $1 billion brand.

Although Aerie is known more for bras and undies, their Chill Play products, which include leggings and other sports wear, seems to be getting some great press. Aerie is more body positive than lululemon, which blamed larger women for fabric failures of their yoga pants. Aerie caters to larger women’s needs. That alone makes them interesting to me and is probably one of the reasons Aerie is doing so well.

There are 943 AEO stores down from 949. Leases for a large percentage of their stores are coming up over the next three years, which will give them additional flexibility to close underperforming stores, without penalties. Even a 91% return over three years, which also includes the 4.34% annual dividend, would be just fine with me. So you have to ask, do you feel they can get back up to $21 in less than 3 years? It worked last time in just two quarters.

This is a good price in my opinion.