American Eagle Outfitters, Inc. (NYSE:AEO) Stocks Shoot Up 27% But Its P/E Still Looks Reasonable

Despite an already strong run, American Eagle Outfitters, Inc. (NYSE:AEO) shares have been powering on, with a gain of 27% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 6.6% isn't as attractive.

In spite of the firm bounce in price, there still wouldn't be many who think American Eagle Outfitters' price-to-earnings (or "P/E") ratio of 18.3x is worth a mention when the median P/E in the United States is similar at about 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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American Eagle Outfitters hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for American Eagle Outfitters

Keen to find out how analysts think American Eagle Outfitters' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For American Eagle Outfitters?

The only time you'd be comfortable seeing a P/E like American Eagle Outfitters' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 16%, which is not materially different.

With this information, we can see why American Eagle Outfitters is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What We Can Learn From American Eagle Outfitters' P/E?

American Eagle Outfitters' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of American Eagle Outfitters' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

You always need to take note of risks, for example - American Eagle Outfitters has 3 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than American Eagle Outfitters. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.