On Monday, Morgan Stanley (NYSE:MS) maintained its Underweight rating on American Eagle Outfitters (NYSE:NYSE:AEO) but reduced the stock's price target to $15.00 from $17.00. The adjustment follows the company's third-quarter earnings, which the analyst described as disappointing, reinforcing concerns about the retailer's gross margin (GM) performance.
According to InvestingPro data, 10 analysts have recently revised their earnings expectations downward, though the company maintains a "GOOD" overall financial health score. The lowered expectations are due to fears of a potential reversion from current highs, as well as doubts regarding the company's ability to meet long-term operating margin targets.
The financial firm's analysis suggests an average double-digit percentage downside to the approximately 2025 earnings per share estimates for American Eagle Outfitters. This outlook is driven by the potential for the company's price-to-earnings (P/E) ratio to de-rate to the high single digits in the near term—a significant drop from its 12 times pre-Covid average.
Currently trading at a P/E of 14.9x, InvestingPro analysis indicates the stock is trading at a high multiple relative to its near-term earnings growth potential. The anticipated devaluation aligns with the historical valuation of specialty retail peers who have also been missing or lowering their estimates.
American Eagle's recent performance has led to heightened scrutiny from analysts, with the third-quarter results particularly highlighting issues with gross margin misses. The stock has taken a significant hit, dropping nearly 10% in the past week alone.
This has increased skepticism about the retailer's capacity to achieve its projected long-term operating margin, which is a key factor in the firm's ongoing Underweight rating.
Despite these concerns, InvestingPro's Fair Value analysis suggests the stock may be undervalued at current levels, with additional insights available in the comprehensive Pro Research Report.
The new price target of $15 reflects a more cautious stance on American Eagle's stock value, considering the broader industry trends and the company's specific challenges. The analyst's comments suggest that unless American Eagle addresses these underlying issues, its stock could continue to face pressure.
For deeper insights into AEO's valuation metrics, growth potential, and comprehensive financial analysis, investors can access the full suite of tools and expert analysis available on InvestingPro.
In summary, Morgan Stanley's revision of American Eagle's price target and the confirmation of its Underweight rating indicate a conservative outlook for the retailer's financial performance in the near future. The firm anticipates that American Eagle may struggle to maintain its earnings momentum, which could lead to a lower valuation compared to historical averages.
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