American Greetings: A Value Trap Or A Good Opportunity For Outsized Gains?

| About: American Greetings (AM-OLD)

The current common stock price of American Greetings (NYSE:AM-OLD) is a great example of the classic problem investor's face when searching for undervalued stocks which might represent a great buying opportunity. Let's look at the American Greetings business to see what the current situation is.

Business Description

American Greetings is a designer, manufacturer, and distributor of greeting cards on a global scale. According to its most recent 10-Q (filed November 14, 2011), the company reports financial results based on four operating segments: North American Social Expression, International Social Expression, American Greetings Interactive, and Non-Reportable Segments (licensing and fixture displays). Here is a summary of the 6 months revenues and operating profits through August 26, 2011:


Revenues (millions)

Percentage of Revenues

North American












Total Revenues




Operating Profits (millions)

Operating Profit Margin

North American












Total Operating Profit



The North American division represents the majority of the business, 73% of total revenues and 85/113.2=75% of total operating profits. The international operations have the poorest margins, typically due to the need to constantly invest for growth. The interactive and non-reportable segments have excellent margins but lack scale.

In the most recent earnings report on December 22, 2011, American Greetings reported revenues of $463 million and operating income of $33 million. Management also reduced 2012 guidance of operating cash flow to a range of $90-110 million (from $125-145).

2012 capital expenditure was also increased from $45-50 million to $55-70 million with the increase expected in working capital. On the positive side, revenues increased 8% versus a target of 3%.

In looking at the balance sheet from August, inventories ballooned to $249 million from $180 million at the end of February. In reading the transcript from the most recent conference call, management indicated about 40-50% of the working capital and inventory increase is related to the purchase of the Watermark business in the U.K. These increases are planned at least through the middle of 2012. The rest of the increase is from spending to support existing channels.

Growth Opportunities

The largest growth opportunity for American Greetings is in the international division, which is the fastest growing section of the enterprise. According to the transcript, year over year revenues grew almost 25% from $80 million to $103 million in the most recent quarter. The operating margin was 10%, 3% of which was related to the effects of foreign exchange fluctuations but offset by higher supply chain costs and a shift in business mix to lower margin products.

The second large growth opportunity is in the interactive portion of the business, where the company is investing in acquired businesses like,, and in the development of a mobile application called Justwink. The company expects to continue investing in the interactive businesses for the foreseeable future.

Other Developments and Considerations

Management has been spending money on updating their existing systems to replace existing equipment, become more efficient and add capacity. The company is also planning on building a new headquarters with a planned net capital outlay of $30 million. The total net cost has a lot of moving parts included in it, including tax credits, loans, and other incentives from the state of Ohio, the sale of their current existing building, and the different scenarios regarding architectural designs and structures.

In the most recent quarter, management refinanced it's $213 million of 7.375% notes due 2016 to a later maturity in 2021, at the same interest rate. In addition, the company bought back 2 million shares, or 5% of its total outstanding during this time frame. The current dividend is .60 cents per share or a current yield of 4.8%. The payout ratio on the dividend is low at approximately 35% of net income.


With approximately 40 million shares outstanding, and at a current price per share of $12.50, the current market capitalization is $500 million. If one adds existing debt and subtracts cash, the total enterprise value is 500+(230-80)= 650 million. If one evaluates stock based on P/E multiples, based on the December 22, 2011 earnings release, current diluted EPS for the most recent 9 month period is 1.63 with the most recent quarter coming in at .50 cents per share. If we annualize EPS at 2.00 per share, the current trailing P/E ratio is 12.50/2 or 6.25, which is not exactly in the or universe (nor should it be, different industry). Certainly viewed using this financial metric not expensive, especially if the top line grows at 8-10% per year.

If we use operating cash flow as our basis in market capitalization and enterprise value, the pertinent issue becomes what is the correct number to use. If we take the 2012 forecast of $90-100 million per year, the valuation becomes 500/100=5X OCF or 650/100=6.5X OCF, still not very expensive at all.

If however, we use an average of the most recent three years worth of operating cash flow, we would use 2011-$180, 2010-$197, and 2009-73 as the figures and our average would be

180+197+73/3=150. Using the 150 number for OCF, the valuations drop to 500/150=3.3X OCF or 650/150=4.33X OCF. Clearly, the reduced guidance makes the valuation more expensive, but any kind of better than expected results makes the current price very cheap. Capital expenditures do not typically make up a large percentage of operating cash flow, so buyers are getting a business which historically generates large amounts of free cash flow (for example, cap ex in 2011, 2010, and 2009 was $36, 26, and 56 million respectively).

Decision Time

Putting all the information together, a buyer of American Greetings is obtaining a business where management acknowledges there are a lot of unknowns. They have indicated the business is changing but believe they can take out costs in different areas to maintain their historical margins. Management targets 3% revenue growth, which is a very low and slow rate, but they also state there could be upside and in the most recent quarter revenues grew at 8%. Management has a very good historical track record of operational capability and creating shareholder value. The bottom line is whether you believe the company will execute, have the revenues grow at better than anticipated rates, and be able to maintain margins in the face of a variety of new competition and supply issues. If you do, then the stock is cheap and you buy, as I have. If you don't, you look elsewhere. Thanks for reading.


  1. American Greetings Form 10-Q November 14, 2011.
  2. American Greetings Third Quarter 2011 Earnings Release December 22, 2011.

  3. American Greetings Earnings Call Transcript from Seeking Alpha, December 22, 2011.

Disclosure: I am long AM-OLD.