Trying to be a contrarian and looking at what is most unloved right now, I added AEO to my basket of retailers ARO, DDS, and KSS. Weather, recession, sub-prime mess, oh my! Retailers have been whacked. But I think owning a retailer targeting the 15-25 year old audience with the holidays coming up makes sense. The valuations looks good. They have a strong brand with kids. Yes, they had a bad September and they lowered Q3 guidance, but it strikes me as a growth stock now priced as a value stock.
Company: AEO
Date: 10/26/2007
Next year's expected earnings: $2.15
EPS growth rate used for estimate: 10% (vs. consensus 14.9%)
Multiple Graham used for estimate: 8.5
Graham Fair Value: $43.14
Current Price: $22.84
$ difference: $20.30
Percent Growth to Fair Value: 88.87%
Three weekly chart with EPS and PE lines showing support at 22ish, back to July 2005:
Market Cap (intraday)5: 4.91B
Enterprise Value (26-Oct-07)3: 4.20B
Trailing P/E (ttm, intraday): 12.56
Forward P/E (fye 03-Feb-09) 1: 10.62
PEG Ratio (5 yr expected): 0.80
Price/Sales (ttm): 1.62
Price/Book (mrq): 3.56
Enterprise Value/Revenue (ttm)3: 1.41
Enterprise Value/EBITDA (ttm)3: 5.884
Profit Margin (ttm): 13.78%
Operating Margin (ttm): 20.94%
Return on Assets (ttm): 21.80%
Return on Equity (ttm): 30.82%
Revenue (ttm): 2.99B
Revenue Per Share (ttm): 13.524
Qtrly Revenue Growth (yoy): 16.70%
Gross Profit (ttm): 1.34B
EBITDA (ttm): 713.97M
Net Income Avl to Common (ttm): 411.22M
Diluted EPS (ttm): 1.819
Qtrly Earnings Growth (yoy): 12.80%
Total Cash (mrq): 634.60M
Total Cash Per Share (mrq): 2.953
Total Debt (mrq): 0
Total Debt/Equity (mrq): N/A
Current Ratio (mrq): 3.483
Book Value Per Share (mrq): 6.328
Operating Cash Flow (ttm): 436.20M
Levered Free Cash Flow (ttm): 106.08M
A post from AEO Yahoo board, 10/20:
Okay, let's do the discounted cash flows to identify the actual value of AOE.
From 2002 through 2006, free cash flows increased 56 percent yearly. This is clearly unsustainable, just as it is impressive. So, let's go with a very conservative figure ... say, 10 percent per annum for the next decade, followed by 5 percent for the decade following (figure 3 percent in inflation, which is rising, and 7 percent expanding operations).
That gives the company a per-share value of $33.87. Next, let's discount that figure by another 25 percent, and we get a per-share value of $25.40 as the purchase threshold. The current price, at yesterday's close of business, was $22.68 -- well below this conservative estimate of a conservative estimate.
AOE has almost no bank or bond debt (free cash flows exceed current liabilities by 113 percent), so the vast majority of its Weighted Average Cost of Capital is attributable to equity (less than 1 percent is conventional debt). Combined, WACC comes in at 13.77 percent, versus the Cash Return on Invested Capital at 34.3 percent. In other words, CROIC exceeds WACC by 249 percent. Literally, that is money in the bank, and it represents a further margin of safety if revenue streams slow significantly (i.e., more than would be attributable to an unseasonably warm September).
In other words, AOE can survive the negative impact of global warming on the fashion preferences and wallets of teenagers and young adults. It can survive even if the housing market promotes a “debt effect” among the target customer’s parental benefactors. And, more germane to us, the stock is way below its intrinsic value ... by roughly 80 percent, if based on the median FCF rate of 35 percent for the last decade. |
