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American Eagle (AEO) is a clothing retailer that markets mainly to teens and college age individuals.

I actually already have purchased a position in AEO before doing my analysis. The reason for this is I live in Pittsburgh where AEO is headquartered, so I’m always reading about the company in the paper and keeping up with current company events. I also know people who have worked there, or are related to employees at AEO. Because of this I essentially already did some of my analysis on the background of the company.

I have always been impressed with AEO. What pushed me over the edge to purchase was the insider purchases recently. Usually with a company when insiders start buying they know the shares are undervalued and it’s time to pick them up cheap.

Debt

There is no debt on their books

Pros

American Eagle Outfitters has a strong brand and strong presense in teen culture. While building a strong brand in teen retailing isn’t impossible it doesn’t happen overnight. I consider AEO’s brand to be a competitive advantage.

$6.22/share in net current assets

Cons

While many teens would consider trendy clothing vital it unfortunatly isn’t the case.  Retail is subject to rising costs in oil, and the consumer credit crunch.  The outside risk factors could weigh on holiday sales, which is traditionally a strong time of the year for them.

Cash Flow

This is a little lower than I’d like.  AEO is not a cash flow rich company, and doesn’t appear that it ever has.   The current P/CF is 12.12 according to Morningstar.

Dividend Policy

There is currenly a $.40/share dividend which is approx 1.68% percent.

Current Share Details

As of 10/18/07 AEO closed at: $23.30

Disclaimer: I currently own a position in AEO 

Biovail Corp [ticker: BVF] is a pharmaceutical company that develops, manufactures, and delivers drugs to the United States and Canada.

Pros:

New CEO in 2004 has shaken things up at the company, eliminating losing divisions and tripling the dividend.

Cons:

Restating earnings from 2006,2005,2004. The restatement has occurred due to weak financial controls. They overstated the amortization expense for a drug they ordered from GlaxoSmithKline. This resulted in a 17.4M net income recognition in 2007. It’s possible the accounting tricks have not stopped.

This is a drug company, in August they were denied FDA approval on one of their drugs which send the stock down 20%, this could happen again with any of the drugs they have in their pipeline.

Biovail is a Canadian company, so currency risk is involved in both their sales, and from the investor standpoint the purchase of their stock and dividends.

Warnings:

The accounting revisions are troubling, there could possibly be more problems.  The auditor as of March 2007 stated that they do not believe internal controls can catch accounting problems.  This statement is extremely troubling.
Due to the nature of the business there could be significant litigation. I am not as worried about this in the near-term. But the news of a possible lawsuit could severely depress the price of the issue.

Cash Flow:

The cash flow is strong, but can be spotty. In the fiscal year 2006 free cash flow was as follows:

• Q1 - 76,480,000
• Q2 - 98,116,000
• Q3 - 78,913,000 (made possible by an asset writes down of 147M, otherwise a loss)
• Q4 - 228,561,000

Dividend Policy:

There’s a $1.5 dividend per share which is about an 8% yield.

Debt/Equity:

No long term debt

Long Term Growth:

I don’t see anything in the near term impeding Biovail’s growth.

Management:

CEO Dr. Douglas J.P. Squires is a relatively new in the position. He was also recently named interim Chairman.  CEO Squires has taken an active approach in turning the company around.

The CFO who presided over the accounting scandal has left.

Price:

As of 10/4/2007 BVF closed at: $18.45