What happened
Shares of teen clothing retailer American Eagle Outfitters (AEO 0.18%) stock jumped 2.6% in Monday afternoon trading as of 3:15 p.m. ET -- and for a most curious reason: Investment bank J.P. Morgan just cut its price target on the clothier's stock by $3.
Image source: Getty Images.
So what
That sounds a bit counterintuitive, but here's the thing: The price target J.P. Morgan now assigns to AE -- $29 a share -- may be $3 below what the banker previously thought the stock was worth, but $29 is also a staggering 75% more than what American Eagle Outfitters stock costs today.
Yes, you read that right: J.P. Morgan just predicted American Eagle investors would gain a 75% profit within a year.
As the analyst explained in a note covered by TheFly.com this morning, J.P. Morgan's "annual Retail Round-Up" shows surprising "resilience" among American consumers, implying pretty decent sales for retailers going forward. And in an environment where both consumer demand and retail inventories are "healthy" (i.e., not overstocked, not understocked), this means companies like American Eagle are unlikely to have to discount their wares heavily in order to move product this year.
Now what
Suffice it to say that this all bodes well for American Eagle Outfitters achieving the 13% sales growth rate that Wall Street is forecasting for the company this year. More than that, if discounting is only modest this year, then in light of those expanding sales, American Eagle might well outperform expectations for a decline in profit this year. It might even grow its earnings.
Even if that doesn't happen, though, even if AE only succeeds in earning, say, no more than the $2.03 per share that it earned last year, then American Eagle shares at their current $16.63 per share cost no more than 8.2 times current-year earnings. And given that most analysts agree that over the long term, AE should be able to grow its earnings at better than 10% annually, that means that American Eagle stock is selling for well under a 1 price-to-earnings growth ratio.
Throw in a hefty 4.4% dividend yield to sweeten the deal, and I have to agree with J.P. Morgan on this one: American Eagle stock has the potential to provide investors with very nice profits indeed.
