On December 22nd, 2011 we began purchasing shares of American Greetings Corp. (NYSE:AM-OLD) at $12.91 per share for investors. To our surprise, we were able to get several more large blocks of the shares in extended hours trade on the evening of January 4th, 2012 for the same accounts.
We’re thrilled that as of the writing of this article, the price has actually gone done even further (explained below). We like to think of the stock as having three possible outcomes for buyers in our time frame:
a) The price goes up and the shareholders Win.
(Simple equity appreciation)
b) The price goes down and the shareholders Win.
(Increased share repurchases and related improvement in earnings metrics)
c) The price doesn’t move and the shareholders Win.
(High dividend and real estate give away)
Because of the great volatility in potential outcomes involved we affectionately refer to it as the “Win-Win-Win” or Triple “W” stock. We think it will have special appeal to those who confuse “beta” with “risk”.
Our original purchases followed a rather precipitous (25%) decline in the share price from the December 21st closing price and an overall decline of some 50% in the share price since the beginning of 2011.
When the share repurchases over the years are taken into account, the price of the issue has effectively declined about 75% since its mid 2007 highs. This share-adjusted decline is rather extraordinary given the fact that the tangible net worth in the company is actually higher now than it was then, but again this figure, much like the adjusted per-share book value, is not immediately evident. This is largely because of a large write-down in intangibles taken in 2009. If intangibles were overstated in 2009, they are now understated, a presentation we prefer.
Growth in equity in recent years:
|2012 through Q3||0%||$766,977,000|
|12 month forecast||$871,311,316|
|Avg. w/ dividend:||18%|
|BV per share (1 yr.)||$22.07|
Growth in “Per Share Book Value” in the same period:
|Year||Delta||BV per share|
|2012 through Q3||0%||$19.43|
|12 month forecast||$23.76|
|Avg. w/ dividend:||26%|
The business does not immediately meet the criteria of a traditional “value” investment, at least not from a “Net Working Capital” perspective (their “net working capital” position is negative), but we are excited to own the shares nonetheless because the company does boast very positive stats at the current price and more security in the assets backing the issue than may be immediately obvious to the casual observer.
1. In the twelve months running up to the most recent earnings announcement, the company threw off about 90 million In free cash from operations, which represents about 20% of the market cap.
2. Net income available to the common is ~83 million in the same time frame, or about 18% of the market cap (representing ~100% return of the buyers investment in about 4 years’ time when taken together with the nearly 5% annual dividend)
3. These figures create a rather low trailing price to earnings ratio of only ~6.3 and while we don’t typically ascribe to forward P/E ratios, we do believe AM will hit their future targets, and so the ~6 figure for future P/E seems acceptable.
4. Finally, we are left with an enterprise value/EBITDA (ttm) of only 3.22 and a tiny price/book (mrq) of just .64 (even less when the present market value of certain assets is considered).
As good as the metrics are above, they are actually understated. Items 1 through 3 (the earnings derivatives) are all about to change. Thursday, after close of market, the company announced another 75 million share repurchase program. The last share repurchase program was announced in 2009 and was also for 75 million, with the last tranche (revealed in the Q3 2012 earnings release) removing another 2 million shares from the open market.
At the current price, the new program has the potential to take back an additional 15% of the remaining shares (about 6 million) over and above the ~50% already taken off the market over the last seven years. These are large, aggressive and very shareholder friendly actions, the impact of which the average investor may not fully appreciate.
The average retail or passive investor may not always asses the dynamics of these finer points (which have nothing to do with the all-important “sales trends” most obsess on). "Value-oriented" fund managers may be more savvy in this respect but are likely to find the company is simply too small to make a meaningful investment in. However, for a third genus of the species, the “enterprising” and independent value oriented investor, “there's gold in them thar' mountains”.
Share repurchase math for recent years:
Number of Shares
2012 through Q3
12 month forecast
On average the company has repurchased just over 7% of their own shares per annum in recent years, a trend which is now assured to continue, and would indicate some ~36.6 million shares outstanding in the next 12 months. However, it may be fair to forecast an even smaller number outstanding by this time next year. We reason this because the company was willing to pay an average price of $17.25 per share (34.5 million) to accumulate the 2 million shares they took back in Q3 2012 alone, so we think it is likely they would be out buying aggressively when the stock is presently below $13. All that the enterprising investor needs to do then, particularly if the earnings coefficients are more important than the statement of assets, is recalculate points 1 -3 above with the new divisor (call it 35 million shares).
This, taken with the unusually high dividend, is something like getting a free derivative hedge for recent buyers. Here are two scenarios:
The "hoped for" scenario of the average short-term investor - the price goes up.
Owners of the company’s common shares (unlike senior secured debt holders) have an increase in the value of their holdings, which as marketable securities can be realized at any time. In the meantime, a 5% dividend should assuage the seemingly “long-sufferings” of the impatient.
The less obvious "enterprising" scenario - the price goes down.
The company will be out buying shares at a lower price (thus stretching the dollars so to speak), and increasing not only per share future earnings for existing owners, but also increasing (without any further capital outlay), their pro-rata share of the company. If you’re an owner and don’t mind being a little patient, then nothing can be better than a decline in the price of the shares because, much like a derivative hedge (and a free one), owners are actually getting paid for a decline in the share price, but unlike an owner of derivatives, can focus on the full benefits of real and direct ownership in a long standing profitable company.
Good news for hard core balance sheet investors
Anyone who reads our Amvona blog knows that we are not big fans of real estate – we just think an investor shouldn’t pay for something that they will never really own.
However, considering ourselves to be reasonable, we are willing to make exceptions, particularly in the case where the real estate was acquired prior to the 2002-2007 era (or 'the good old days' when Ponzi schemes using real estate was all the rage), and when the price is, well, free - as is the case in AM.
American Greetings, in their own GAAP’ish way books their assets at cost, including their real estate. This becomes especially noteworthy when talking about a 105 year old company.
The undervaluation of the real estate on the balance sheet provides greater security than the casual observer may at first realize. ~9.1 million sq. feet of commercial space booked at 188 million as of FYE 2011 comes to about $20 per square foot. We are not sure on what planet open warehouse space (let alone office) could be built for less than $50 (land costs aside). If this conclusion is accurate then $188 million represents less than 40% of the potential value (and in all likelihood much less). So there may be more than $200 million in additional tangible value not represented on the balance sheet.
In rough figures, $200 million in real estate (conservative), divided by 35 million shares (also conservative), is an additional ~$5.70 per share in missing tangible book value. If that was added to the current book value of $19.43 (which is also almost all tangible thanks to the 2009 write-down), than the real book value may be north of $25 making the actual P/B ratio much closer to .50 than the stated .65 – that is to say more than an adequate margin of safety or the proverbial “dollar for .50 cents”.
Chief Executive Officer Zev Weiss said in his recent announcement:
We remain committed to our product leadership strategy and recognize that, at times, it may temporarily create volatility in our financial performance. As demonstrated by today's announcement of a new share repurchase authorization, we believe that our current stock price is undervalued.
We couldn’t agree more Zev!