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No. of Recommendations: 5
Post 469 explains why I bought American Eagle a few weeks back. I estimate its intrinsic value at $33 a share, based on the following assumptions:

GAAP earnings: $330M (trailing 12 months, per Reuters)
Earnings growth:
Years 1-5: 7%
Years 6-10: 5%
Years 11-20: 4%
Terminal: 3%
Discount rate: 10% (high-quality earnings, net cash balance sheet, insider ownership)
Share dilution: 3% a year (same as 2000-2004)

My maximum Buy price is 75% of intrinsic value, or $25. If the stock hits 115% of intrinsic value, or $38, then I will sell.

Although Yahoo Finance says American Eagle will grow 15% a year for the next five years, this seems aggressive since management is debuting a new and unproven store concept. If the Martin + Osa retail chain disappoints, then management will be distracted from its core American Eagle concept, which puts sales growth and margins at risk.

If earnings do grow 15% a year for the next five years, then American Eagles intrinsic value is $44 a share.


long AEOS
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