Is American Eagle Outfitters (AEO) a Great Stock for Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put American Eagle Outfitters, Inc. AEO stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, American Eagle Outfitters has a trailing twelve months PE ratio of 17.8, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 21.3. If we focus on the long-term PE trend, American Eagle Outfitters’ current PE level puts it above its midpoint over the past five years, with the number having risen rapidly over the past few months.

However, the stock’s PE compares unfavorably with the Zacks Retail - Apparel and Shoes industry’s trailing twelve months PE ratio, which stands at 17. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers.

We should also point out that American Eagle Outfitters has a forward PE ratio (price relative to this year’s earnings) of just 14, so it is fair to say that a slightly more value-oriented path may be ahead for American Eagle Outfitters stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, American Eagle Outfitters has a P/S ratio of about 1. This is a bit lower than the S&P 500 average, which comes in at 3.5x right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years, suggesting some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, American Eagle Outfitters currently has a Value Score of A, putting it into the top 20% of all stocks we cover from this look. This makes American Eagle Outfitters a solid choice for value investors.

What About the Stock Overall?

Though American Eagle Outfitters might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of B and a Momentum Score of D. This gives AEO a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been pretty encouraging. The current year has seen four estimates go higher in the past sixty days compared to none lower, while the next year estimate has seen eight up and no down in the same time period.

This has had a significant impact on the consensus estimate though as the current year consensus estimate has risen by 0.9% in the past two months, while the next year estimate has gone up by 11.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

American Eagle Outfitters, Inc. Price and Consensus

American Eagle Outfitters, Inc. Price and Consensus | American Eagle Outfitters, Inc. Quote

This bullish trend is why the stock has just a Zacks Rank #2 (Buy) and why we are looking for better performance from the company in the near term.

Bottom Line

American Eagle Outfitters is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 28% out of more than 250 industries) further strengthens its growth potential.

So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.

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