American Eagle Outfitters, Inc.'s (NYSE:AEO) Subdued P/E Might Signal An Opportunity

American Eagle Outfitters, Inc.'s (NYSE:AEO) price-to-earnings (or "P/E") ratio of 12x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 34x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, American Eagle Outfitters has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See 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.

How Is American Eagle Outfitters' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as American Eagle Outfitters' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a worthy increase of 7.2%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 46% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 49% as estimated by the ten analysts watching the company. That's shaping up to be materially higher than the 14% growth forecast for the broader market.

In light of this, it's peculiar that American Eagle Outfitters' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On American Eagle Outfitters' P/E

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.

Our examination of American Eagle Outfitters' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with American Eagle Outfitters.

If these risks are making you reconsider your opinion on American Eagle Outfitters, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.