FBR Upgrades American Eagle: Upside, Execution, Value 'Hard To Ignore'

• American Eagle Outfitters AEO shares are up a little over 16 percent year-to-date, despite having declined 8 percent over the past month.
• FBR analyst Susan Anderson upgraded the rating on the stock from Market Perform to Outperform, while raising the price target from $17 to $19.
• American Eagle Outfitters’ current valuation is attractive and has upside with the stabilization of the market and consistent execution by the company, Anderson believes.

Analyst Susan Anderson said that consistent execution by American Eagle Outfitters is proving that the company “can produce upside amidst a declining backdrop.”

“With more difficult 2H15 compares, we believe expectations have come down and the recent stock market rout, unrelated to AEO’s fundamentals, has created a very attractive entry point,” Anderson added.

American Eagle Outfitters is expected to beat the 2H15 expectations, in view of its potential 3Q comp outperformance and 4Q gross margin upside. The FBR report noted, “We are still wary of the environment beyond 2H15 but believe AEO’s brand recognition, product execution, right-sized fleet, and aerie/int'l growth prepare it to drive upside to expectations in a competitive environment.”

The EPS estimates for 2015 and 2016 have been raised from $0.96 to $1.04 and from $1.07 to $1.14, respectively.

Anderson expects American Eagle Outfitters to use its excess cash for dividend hikes and share repurchases from as early as 3Q onwards. “Increasing cash return would indicate more business stability and would likely be rewarded by investors,” Anderson wrote.