HomeMost PopularInvestingCan American Eagle Stock Return To Pre-Inflation Shock Highs?

Can American Eagle Stock Return To Pre-Inflation Shock Highs?

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American Eagle Outfitters (NYSE: AEO), which sells males’s and girls’s attire and equipment beneath the American Eagle, Tailgate, Todd Snyder, and Aerie manufacturers at the moment trades at $17 per share, round 56% beneath its stage of $38 seen on April 25, 2021 (pre-inflation shock excessive), and has the potential for sizable features. AEO noticed its inventory buying and selling at round $9.73 on the finish of October 2022, when the Fed stored growing charges, and now stays up by about 72% from these ranges. Compared, the S&P 500 gained solely about 6% throughout this era. AEO inventory has benefited from better-than-expected fiscal first-half outcomes. Regardless of flattish gross sales within the first two quarters of 2023, the retailer’s gross revenue and working revenue noticed vital enhancements – resulting in a turnaround in earnings per share. With higher stock management and decrease transportation and product prices, administration achieved margin growth because of fewer markdowns. That mentioned, AEO’s gross margins within the fiscal first half got here in at 37.7%, a big 680 foundation factors up year-over-year (y-o-y). Equally, its working margin throughout the identical interval got here in at 5.4%, up from a mere 1.2% in the identical interval final 12 months. AEO noticed a revenue of 25 cents per share within the first six months of FY’23 in comparison with a detrimental 24 cents in the identical interval final 12 months.

Notably, AEO inventory had a Sharpe Ratio of 0.3 since early 2017, which is decrease than the determine of 0.6 for the S&P 500 Index over the identical interval. Examine this with the Sharpe of 1.2 for the Trefis Bolstered Worth portfolio. Sharpe is a measure of return per unit of threat, and high-performance portfolios can present one of the best of each worlds.

Returning to the pre-inflation shock stage signifies that American Eagle Outfitters should acquire about 120% from right here. Whereas it has the potential to get better to these ranges, we estimate American Eagle Outfitters’ Valuation to be round $17 per share, virtually according to the present market worth. It is very important regulate freight charges as rising gas prices could possibly be a threat shifting ahead. Our detailed evaluation of American Eagle Outfitters’ upside post-inflation shock captures tendencies within the firm’s inventory through the turbulent market circumstances seen over 2022 and compares these tendencies to the inventory’s efficiency through the 2008 recession.

 

2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Enhance in cash provide to cushion the influence of lockdowns led to excessive demand for items; producers had been unable to match up.
  • Early 2021: Transport snarls and employee shortages from the coronavirus pandemic proceed to harm the provision
  • April 2021: Inflation charges cross 4% and enhance quickly
  • Early 2022: Power and meals costs spike as a result of Russian invasion of Ukraine. Fed begins its price hike course of
  • June 2022: Inflation ranges peak at 9% – the best stage in 40 years. S&P 500 index declines greater than 20% from peak ranges.
  • July – September 2022: Fed hikes rates of interest aggressively – leading to an preliminary restoration within the S&P 500 adopted by one other sharp decline
  • Since October 2022: Fed continues price hike course of; bettering market sentiments assist S&P500 recoup a few of its losses

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In distinction, right here’s how AEO inventory and the broader market carried out through the 2007/2008 disaster.

Timeline of 2007-08 Disaster

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline similar to Lehman chapter submitting (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Preliminary restoration to ranges earlier than accelerated decline (round 9/1/2008)

AEO and S&P 500 Efficiency Throughout 2007-08 Disaster

AEO inventory declined from almost $26 in October 2007 (pre-crisis peak) to $10 in March 2009 (because the markets bottomed out), implying that AEO inventory misplaced virtually 62% of its pre-crisis worth. It recovered from the 2008 disaster to ranges of round $17 in early 2010, rising roughly 74% between March 2009 and January 2010. The S&P 500 Index noticed a decline of 51%, falling from ranges of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to succeed in ranges of 1,124.

AEO Fundamentals Over Current Years

AEO revenues declined from round $4.3 billion in 2019 to about $3.8 billion in 2020, as a result of influence of Covid-19. Nevertheless, gross sales rose again to $5 billion in 2022, as demand picked up. Earnings per share declined from round $1.13 in 2019 to a lack of $1.26 in 2020, though it rose to about $0.69 in 2022. In 2022, inflation has curbed shopper spending and pushed up freight prices for the corporate, in addition to provide chain challenges. Its Aerie model has grown regardless of the macroeconomic surroundings, whereas its namesake model has struggled with powerful comparisons to its post-pandemic restoration.

Conclusion

With the Fed’s efforts to tame runaway inflation charges serving to market sentiment, we consider AEO inventory has the potential for robust features as soon as fears of a possible recession are allayed.

It is usually useful to see how its friends stack up. Take a look at how AEO’s Friends fare on metrics that matter. You can see different useful comparisons for corporations throughout industries at Peer Comparisons.

Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Complete [2]
 AEO Return -1% 20% 11%
 S&P 500 Return -1% 16% 99%
 Trefis Bolstered Worth Portfolio -2% 29% 562%

[1] Month-to-date and year-to-date as of 9/8/2023
[2] Cumulative whole returns because the finish of 2016

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The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.

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