Gap (GAP) Expected to Beat Earnings Estimates: Should You Buy?

American Eagle Outfitters (AEO) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.

Shares of this teen clothing retailer have returned -14.6% over the past month versus the Zacks S&P 500 composite's +3.1% change. The Zacks Retail - Apparel and Shoes industry, to which American Eagle belongs, has lost 1.9% over this period. Now the key question is: Where could the stock be headed in the near term?

While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.

Earnings Estimate Revisions

Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.

We essentially look at how sell-side analysts covering the stock are revising their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates go up for a company, the fair value for its stock goes up. A higher fair value than the current market price drives investors' interest in buying the stock, leading to its price moving higher. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

American Eagle is expected to post earnings of $0.46 per share for the current quarter, representing a year-over-year change of -6.1%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.3%.

The consensus earnings estimate of $1.77 for the current fiscal year indicates a year-over-year change of +16.5%. This estimate has changed -0.2% over the last 30 days.

For the next fiscal year, the consensus earnings estimate of $1.93 indicates a change of +8.8% from what American Eagle is expected to report a year ago. Over the past month, the estimate has changed -0.5%.

With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #3 (Hold) for American Eagle.

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

Projected Revenue Growth

While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.

For American Eagle, the consensus sales estimate for the current quarter of $1.31 billion indicates a year-over-year change of +0.4%. For the current and next fiscal years, $5.39 billion and $5.59 billion estimates indicate +2.5% and +3.6% changes, respectively.

Last Reported Results and Surprise History

American Eagle reported revenues of $1.29 billion in the last reported quarter, representing a year-over-year change of +7.5%. EPS of $0.39 for the same period compares with $0.25 a year ago.

Compared to the Zacks Consensus Estimate of $1.3 billion, the reported revenues represent a surprise of -1.04%. The EPS surprise was +2.63%.

The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates two times over this period.

Valuation

Without considering a stock's valuation, no investment decision can be efficient. In predicting a stock's future price performance, it's crucial to determine whether its current price correctly reflects the intrinsic value of the underlying business and the company's growth prospects.

While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.

As part of the Zacks Style Scores system, the Zacks Value Style Score (which evaluates both traditional and unconventional valuation metrics) organizes stocks into five groups ranging from A to F (A is better than B; B is better than C; and so on), making it helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

American Eagle is graded A on this front, indicating that it is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Conclusion

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about American Eagle. However, its Zacks Rank #3 does suggest that it may perform in line with the broader market in the near term.

Zacks Investment Research

The most oversold stocks in the consumer discretionary sector presents an opportunity to buy into undervalued companies.

The RSI is a momentum indicator, which compares a stock’s strength on days when prices go up to its strength on days when prices go down. When compared to a stock’s price action, it can give traders a better sense of how a stock may perform in the short term. An asset is typically considered oversold when the RSI is below 30, according to Benzinga Pro.

Here's the latest list of major oversold players in this sector, having an RSI near or below 30.

Levi Strauss & Co

• On Oct. 28, Levi Strauss named Dario Aguilar as Managing Director, Latin America. The company's stock fell around 11% over the past month and has a 52-week low of $13.94.
• RSI Value: 29.52
• LEVI Price Action: Shares of Levi fell 0.7% to close at $16.86 on Tuesday.
• Benzinga Pro's real-time newsfeed alerted to latest LEVI news.

In the latest market close, American Eagle Outfitters (AEO) reached $17.94, with a -1.48% movement compared to the previous day. The stock's change was less than the S&P 500's daily loss of 0.29%. Elsewhere, the Dow lost 0.86%, while the tech-heavy Nasdaq lost 0.09%.

The teen clothing retailer's stock has dropped by 12.07% in the past month, falling short of the Retail-Wholesale sector's gain of 3.95% and the S&P 500's gain of 3.3%.

The investment community will be closely monitoring the performance of American Eagle Outfitters in its forthcoming earnings report. The company is predicted to post an EPS of $0.47, indicating a 4.08% decline compared to the equivalent quarter last year. Simultaneously, our latest consensus estimate expects the revenue to be $1.31 billion, showing a 0.45% escalation compared to the year-ago quarter.

AEO's full-year Zacks Consensus Estimates are calling for earnings of $1.78 per share and revenue of $5.39 billion. These results would represent year-over-year changes of +17.11% and +2.46%, respectively.

Investors should also take note of any recent adjustments to analyst estimates for American Eagle Outfitters. These revisions help to show the ever-changing nature of near-term business trends. With this in mind, we can consider positive estimate revisions a sign of optimism about the company's business outlook.

Empirical research indicates that these revisions in estimates have a direct correlation with impending stock price performance. To benefit from this, we have developed the Zacks Rank, a proprietary model which takes these estimate changes into account and provides an actionable rating system.

The Zacks Rank system, which varies between #1 (Strong Buy) and #5 (Strong Sell), carries an impressive track record of exceeding expectations, confirmed by external audits, with stocks at #1 delivering an average annual return of +25% since 1988. The Zacks Consensus EPS estimate has moved 0.16% lower within the past month. As of now, American Eagle Outfitters holds a Zacks Rank of #3 (Hold).

With respect to valuation, American Eagle Outfitters is currently being traded at a Forward P/E ratio of 10.26. For comparison, its industry has an average Forward P/E of 15.56, which means American Eagle Outfitters is trading at a discount to the group.

Also, we should mention that AEO has a PEG ratio of 0.91. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. As of the close of trade yesterday, the Retail - Apparel and Shoes industry held an average PEG ratio of 1.8.

The Retail - Apparel and Shoes industry is part of the Retail-Wholesale sector. This industry currently has a Zacks Industry Rank of 137, which puts it in the bottom 46% of all 250+ industries.

The strength of our individual industry groups is measured by the Zacks Industry Rank, which is calculated based on the average Zacks Rank of the individual stocks within these groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.

Zacks Investment Research

Maplebear (CART) came out with quarterly earnings of $0.42 per share, beating the Zacks Consensus Estimate of $0.22 per share. This compares to loss of $20.86 per share a year ago. These figures are adjusted for non-recurring items.

This quarterly report represents an earnings surprise of 90.91%. A quarter ago, it was expected that this operator of the Instacart online grocery would post earnings of $0.13 per share when it actually produced earnings of $0.20, delivering a surprise of 53.85%.

Over the last four quarters, the company has surpassed consensus EPS estimates four times.

Maplebear, which belongs to the Zacks Internet - Commerce industry, posted revenues of $852 million for the quarter ended September 2024, surpassing the Zacks Consensus Estimate by 0.81%. This compares to year-ago revenues of $764 million. The company has topped consensus revenue estimates three times over the last four quarters.

The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earnings call.

Maplebear shares have added about 103.4% since the beginning of the year versus the S&P 500's gain of 25.8%.

What's Next for Maplebear?

While Maplebear has outperformed the market so far this year, the question that comes to investors' minds is: what's next for the stock?

There are no easy answers to this key question, but one reliable measure that can help investors address this is the company's earnings outlook. Not only does this include current consensus earnings expectations for the coming quarter(s), but also how these expectations have changed lately.

Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. Investors can track such revisions by themselves or rely on a tried-and-tested rating tool like the Zacks Rank, which has an impressive track record of harnessing the power of earnings estimate revisions.

Ahead of this earnings release, the estimate revisions trend for Maplebear: favorable. While the magnitude and direction of estimate revisions could change following the company's just-released earnings report, the current status translates into a Zacks Rank #2 (Buy) for the stock. So, the shares are expected to outperform the market in the near future. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead. The current consensus EPS estimate is $0.33 on $893.8 million in revenues for the coming quarter and $1.17 on $3.38 billion in revenues for the current fiscal year.

Investors should be mindful of the fact that the outlook for the industry can have a material impact on the performance of the stock as well. In terms of the Zacks Industry Rank, Internet - Commerce is currently in the top 27% of the 250 plus Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Another stock from the broader Zacks Retail-Wholesale sector, American Eagle Outfitters (AEO), has yet to report results for the quarter ended October 2024.

This teen clothing retailer is expected to post quarterly earnings of $0.47 per share in its upcoming report, which represents a year-over-year change of -4.1%. The consensus EPS estimate for the quarter has been revised 0.3% lower over the last 30 days to the current level.

American Eagle Outfitters' revenues are expected to be $1.31 billion, up 0.5% from the year-ago quarter.

Zacks Investment Research