On Tuesday, JPMorgan made a positive adjustment to its stance on American Eagle Outfitters (NYSE:AEO), upgrading the stock from Neutral to Overweight. The firm also set a stock price target of $13.00, suggesting confidence in the apparel company's growth prospects.
The upgrade follows discussions with American Eagle's executive team, where the company's momentum across its brand portfolio was highlighted.
American Eagle's management team, including EVP & CFO Mike Mathias, has conveyed a conservative yet positive three-year financial plan that projects 3-5% consolidated revenue growth and mid-to-high-teens operating income growth.
Notably, the growth forecast for Aerie, one of the company's key brands, is set at a modest pace compared to its historical double-digit compound annual growth rate. Additionally, product margins are expected to remain stable, benefiting from cost favorability and brand mix improvements.
The new stock price target of $13.00 is based on a 15x multiple of the firm's estimated fiscal year 2025 earnings per share, which equates to a price-to-earnings growth (PEG) ratio of 1x for the forecasted earnings per share growth between fiscal years 2024 and 2025.
This valuation also reflects 6.7x the estimated fiscal year 2025 EBITDA, which is higher than American Eagle's pre-pandemic average. The anticipated operating margins for fiscal year 2025 are projected to be roughly 200 basis points above pre-pandemic levels.
The analysis indicates that American Eagle is among the most undervalued stocks in the department stores and specialty softlines sector. The firm's fundamental model for the company predicts a 3-5% revenue growth and approximately 10% adjusted EBIT margins by fiscal year 2026.
This performance is expected to be driven by disciplined cost management and potential product margin expansion, leading to a compound annual growth rate in operating income that is in the mid-to-high teens. The company's financial strategy also includes an annual buyback and a 2% dividend yield, contributing to a total shareholder return profile of 15-20%.
The upgrade comes after American Eagle was placed on JPMorgan's Positive Catalyst Watch in late February, with the firm noting opportunities in the near-term assortment and favorable year-over-year comparisons for the first quarter. The company is also poised to benefit from trends in key categories such as denim for American Eagle and intimates, lounge, and active wear for Aerie.
InvestingPro Insights
In light of JPMorgan's bullish stance on American Eagle Outfitters (NYSE:AEO), real-time data from InvestingPro supports the potential for growth. The company's current market capitalization stands at $4.81 billion, and it is trading at a P/E ratio of 16.95, which is considered low relative to its near-term earnings growth.
This aligns with the InvestingPro Tip that highlights American Eagle's attractive valuation based on its P/E ratio. Additionally, the stock's price movements have demonstrated volatility, which investors should take into account when considering entry points or portfolio adjustments.
American Eagle's revenue growth over the last twelve months as of Q4 2024 was 5.45%, with a notable quarterly revenue growth of 12.22% in Q4 2024. This suggests a positive trajectory that may interest investors looking for companies with expanding revenues.
Moreover, the company has been profitable over the last twelve months, with an impressive return on assets of 4.87%. This profitability is anticipated to continue, as analysts predict the company will be profitable this year as well.
For investors seeking additional insights, there are 7 more InvestingPro Tips available for American Eagle at https://www.investing.com/pro/AEO. To further enrich your investment strategy, consider using the coupon code PRONEWS24 for an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
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