American Eagle Outfitters (NYSE: AEO)
came into the coronavirus pandemic already on the back foot. Shares had fallen more than 50% from July 2018 through the start of the year
and then fell another 50% through March as equities were smashed en masse. As retailers go, they are fairly exposed to the whims of the pandemic and the shutdowns and lockdowns that have been implemented. Not only are they a brick and mortar store at heart
but they’re also a shopping mall staple and absolutely a non-essential business.
But with shares up 90% from their lows of last quarter and 20% in August alone, maybe it’s time for investors to reconsider the bet down stock and ask themselves if the worst is baked into the current share price.
On Wednesday, the folks over at JPMorgan did just that when they upgraded the stock from Neutral to Overweight and raised their price target to $17. This suggests room to the upside of about 40% and would put shares well above pre-COVID levels.
Analyst Matthew Horvers is a fan of the risk/reward profile in play with the company and that over the longer term, the outlook is bright. In a note to clients, he said, "digging deeper, we see the AEO story at a positive multi-year inflection point with Aerie’s double digit top/bottom-line profile reaching scale at $1B revenues and AE brand store closures representing a positive SOTP catalyst (w/ ~50% of leases expiring by 2021-end including 75% of C mall locations) and profitability/SG&A multi-year efficiency opportunity (similar to peer LB)."
The company’s Aerie brand of intimate apparel has become the base that the recovery will be built around. In their fiscal Q1 earnings report in June, Aerie’s revenue was shown to fall only 2% year on year, after a 25% jump last year, compared to the American Eagle brand which saw revenues falling 45% after growth of only 5% last year.
Online Sales Increasing
That same report gave investors a finger on the pulse of how well the company has been able to pivot to e-commerce sales. Despite overall revenue contracting 38% year on year, first quarter revenue from digital sales was up 9%, with Aerie’s online sales up 75% alone. With about two weeks to go until the next earnings report, Wall Street will be watching closely to see if the numbers justify the recent momentum in the stock.
In June, Wedbush highlighted the upcoming back-to-school season as offering solid upside potential to the teen favorite and this will be an interesting catalyst too. They also praised management for swift action at the onset of the pandemic which is paying off now. While raising her price target to $15, analyst Jen Redding wrote “clean inventories support 2Q margin health due to the drastic and swift action taken by management during the initial stages of the crisis. Inventories are clean, and momentum is strong, consumers are engaged".
From a technical perspective, shares are coming off solid support but facing a tough-looking downtrend. At the same time, the coronavirus hasn’t gone away, businesses have just adapted. Still, they have a blue-chip management team that has done everything right so far and looks capable of guiding them out of these choppy waters.
The company’s balance sheet is healthy, with Wedbush particularly impressed with their “$417M cash and available-for-sale investments at FY19 year-end, and the proceeds of approximately $389M from the recent convertible unsecured note offering, leaving the company with more than enough cash to sustain through the next 3 years without positive free cash flow”.
On top of all that, investors who buy into the recovery story have a tempting 4.50% dividend yield to reward them for their patience.
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7 Housing Sector Stocks That May Be Ready to Explode
In one of the strongest economies our nation has ever known, housing stocks should have been going through the roof. But it took the Federal Reserve practically giving money away for homebuyers to get their appetite back.
And then even with mortgage rates at historical lows, the novel coronavirus came on the scene and ruined the party again. Home buying and home building came to a halt. Some of which was simply due to the fact that Americans were staying inside.
One of the closely watched indicators of the health of the housing market is the National Association of Home Builders (NAHB) Housing Market Index (HMI). In March, prior to the national mitigation efforts, the HMI had climbed to 72. For reference purposes, a neutral reading is 50.
Although not unexpected, April showed just how far demand had fallen. The HMI plunged 42 points to 30. Things got slightly better in May as the index climbed to 37.
But that may be changing. In June, the HMI posted a better than expected 56.8%. After hitting 37 in May, this marked the Index’s largest monthly gain ever. And not surprisingly some lagging housing stocks got a much-needed jump start. Homebuilder stocks in particular have been on the rise in recent months.
To help you capitalize on what looks like an emerging trend for the rest of the year, we’ve put together this special presentation.
View the "7 Housing Sector Stocks That May Be Ready to Explode".