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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.


Hewitt

long AEOS
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No. of Recommendations: 0
After looking at AEOS's recent charts, I would say that you will do ok as long as AEOS makes its dividend. A lot of charts look like that these days.
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No. of Recommendations: 2
Hi,

be very careful about basing any valuation off of "earnings"...there are a million things that can skew net income in one direction or another...there are non-cash items that may not have much to do with the ongoing operation of the business that will affect the net income...

the best bet would be to utilize free cash flow (FCF) since that is a true picture of the operating health of the company...try this Fool School Series:

http://www.fool.com/school/introductiontovaluation.htm


thanks,

Royce


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No. of Recommendations: 4
Thanks, Royce.

I use 5-6 different kinds of models to estimate intrinsic value, three of which are variations of the dividend discount model. These variations are: GAAP earnings (see above), defensive profits (free cash flow), and enterprising profits (EVA).

The drivers in the defensive valuation are: sales, sales growth, operating profit margin, cash tax rate, investment rate in fixed and working capital, and share dilution. So, pretty comprehensive.

In a situation where a company has a history of "tight fits" of defensive and enterprising profits to GAAP, then I am comfortable with GAAP. Such is the case with American Eagle.

Of course, past is not prologue and this close correlation of defensive and enterprising to GAAP may not repeat.

If we use defensive profits to value American Eagle, then intrinsic value is $31 based on TTM of $305 million and a 5-year growth rate of 7% a year. At 15% growth, intrinsic value is $44.



Hewitt
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No. of Recommendations: 1
If you visit Joel Greenblatt's Magic Formula website here...

http://www.magicformulainvesting.com/book/login.do?method=auth&authCd=46186&uid=620

...then you will see American Eagle scores highly. The Magic Formula screen looks for companies that possess high earnings quality (return on capital) and low price (high pretax earnings yield).

I set my screen for companies with a market value of at least $250 million.

Happy hunting!


Hewitt

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No. of Recommendations: 1
...then you will see American Eagle scores highly. The Magic Formula screen looks for companies that possess high earnings quality (return on capital) and low price (high pretax earnings yield).

Hello Hewitt. I am also an AEOS owner.

I was sifting through the Magic Formula screener and was mostly finding companies that had recent past success but their futures were considerbaly more in question. Is Greenblatt's screener just backwards looking and if so, do you think you might get a fair number of underperformers this way?

Thanks,

ab
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No. of Recommendations: 0
Interesting list
Two of my biggest losers are included--BSX and PETC
I am hoping this is one of those times that the market doesn't know everything :)
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