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American Eagle Outfitters (AEO), American Science & Engineering, Inc. (ASEI), Time Warner Cable Inc (TWC): Tuesday’s Top Upgrades (and Downgrades)

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Bullish options trade on American Eagle looks for shares to extend runThis series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature a price target hike for Time Warner Cable Inc (NYSE:TWC), balanced by a pair of lowered price targets for American Eagle Outfitters (NYSE:AEO) and American Science & Engineering, Inc. (NASDAQ:ASEI) as well.

Let’s tackle those two “American” stocks first.

AE gets its wings clipped

American Eagle Outfitters (NYSE:AEO) lowered its guidance for second-quarter earnings yesterday. Earnings during the current quarter will likely approximate $0.10 per diluted share, or less than half of what American Eagle Outfitters (NYSE:AEO) earned this quarter last year. AE says that its sales declined 2% in the second quarter. Same-store sales declined 7%. Profit margins are also likely to have declined.

AE CEO Robert Hanson pronounced himself: “Not at all happy with our second-quarter results.” Wall Street seconded the motion this morning, with analysts at both Telsey Advisory Group and UBS cutting their price targets on the stock, to $19 and $18 per share, respectively.

I think that’s an overreaction. Sure, American Eagle Outfitters (NYSE:AEO)’s new guidance is weak enough to raise its P/E ratio from 15 times trailing earnings (a clear bargain) to 17 times current earnings (a bit less so). American Eagle Outfitters (NYSE:AEO) generates strong free cash flow, however. Strong enough that its price-to-free cash flow ratio is currently less than 11 times. That’s pretty cheap if the company can return to the 12% annualized growth rates that analysts had projected for it. Throw in a 2.5% dividend yield, and I think that after today’s 16% drop, American Eagle Outfitters (NYSE:AEO) shares are once again priced to move higher.

American’s Science experiment — a failure or success?
Moving on now to the day’s second “American” story, Backscatter X-ray maker American Science & Engineering, Inc. (NASDAQ:ASEI) reported earnings last night. American Science & Engineering, Inc. (NASDAQ:ASEI) beat estimates on earnings, reporting $0.62 per share in fiscal first-quarter 2014 profits, but missed on revenues, recording about $500,000 less than expected. Analysts at The Benchmark Company responded to the news by reducing their price target on the hold-rated stock by 10%, to $54 per share.

At first glance, this, too, seems an overreaction. A strong producer of free cash flow, American Science & Engineering, Inc. (NASDAQ:ASEI) currently trades for less than 14 times its trailing free cash flow. Throw in a generous 3.3% dividend yield and a 15% projected annual profits growth rate, and you might expect analyst estimates would be going up rather than down.

But here’s the thing: Bookings at American Science & Engineering, Inc. (NASDAQ:ASEI) dropped significantly in the fiscal first quarter. Indeed, American Science & Engineering, Inc. (NASDAQ:ASEI) brought in new orders sufficient to replace only about 70% of the revenue the company recorded into the first quarter. This suggests that revenues will continue to fall in future quarters, and that analysts’ projection of a 15% growth rate may prove overly optimistic.

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