Does the share price for American Eagle Outfitters Inc (NYSE:AEO) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after January 2018 then I highly recommend you check out the latest calculation for American Eagle Outfitters here.
Crunching the numbers
I use what is known as the 2-stage model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I pulled together the analyst consensus estimates of AEO’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.49%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $882.6M. Want to understand how I arrived at this number? Read our detailed analysis here.
In the visual above, we see how how AEO’s earnings are expected to move in the future, which should give you some color on AEO’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of $2,728.6M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $3,611.2M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $20.37, which, compared to the current share price of $18.06, we find that American Eagle Outfitters is about right, perhaps slightly undervalued at a 11.33% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For AEO, I’ve compiled three key aspects you should look at:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.