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No. of Recommendations: 27
Greetings Fellow Earnings Power Fools,

I have a column on Real Money now about American Eagle (AEO).

Reasons why I like the teen retailer are:

1. Authentic Earnings Power and Earnings Power Staircase.

2.$760 million of cash and zero interest-bearing debt. 

3. Tangible book value is 99% of corporate net worth, which means the chance of a goodwill impairment charge is nil. 

4. Three-year return on capital (operating leases included) is 23%. 

5. Three-year return on incremental investment is a spectacular 71%. 

6. Dividends. 

7. Schottenstein family has 27-year association with AEO, and they own shares worth $780 million.  

8. Enterprise value-maintenance enterprise value free cash flow multiple is 15x, for a 6.7% yield. Your cash-on-cash return from owning AEO is 210 basis points better than the 10-year Treasury, which yields around 4.6%. Throw in growth and your EV-MEVFCF yield may reach the mid-teens in 5-7 years.  

9. Intrinsic value is $44, based on the PIV-ER model we discussed a few months back. My growth forecast scenarios for Years 1-5 are 7.5%, 11.35%, and 15%, with 75% of the weighting on the Low and Medium forecasts. Share count is expected to increase 1% a year, which is the same as the last 5 years. 

10. Board chair Jay Schottenstein bought 1 million shares in various open market purchases in late-August and early-September, at a few bucks per share less than the current price. Schottenstein is a canny trader of his company’s stock; two years ago he bought 1 million shares at $21 and then sold from as high as $48 down to the low $30s. At current prices, Schottenstein knows his company is once again undervalued. 

11. Linda Greenblatt (yes, Joel’s sister), has a $150 million equity fund (Saddle Rock), and 44% of her portfolio is in AEO stock, per June 30 10-F.   


Hewitt
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