Why Investors Shouldn't Be Surprised By American Eagle Outfitters, Inc.'s (NYSE:AEO) P/E

American Eagle Outfitters, Inc.'s (NYSE:AEO) price-to-earnings (or "P/E") ratio of 18.6x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 8x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's superior to most other companies of late, American Eagle Outfitters has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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 high as American Eagle Outfitters' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 62% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 30% over the next year. With the market only predicted to deliver 10%, the company is positioned for a stronger earnings result.

With this information, we can see why American Eagle Outfitters is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that American Eagle Outfitters maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for American Eagle Outfitters you should know about.

You might be able to find a better investment than American Eagle Outfitters. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.