American Greetings Looks Like a Buy Ahead of Earnings

Jun.24.08 | About: American Greetings (AM-OLD)

American Greetings (NYSE:AM-OLD) is one of the world's largest manufacturers of social expression products. Along with greeting cards, its product lines include gift wrap, party goods, stationery, calendars, ornaments and electronic greetings.

Market cap: $900 million; Enterprise Value: $1 billion

Next earnings date: Wed, Jun 25 evening

The company is estimated to earn $1.65 per share this year (FY ending Feb ’09) and $1.85 next year. The earnings estimates look reasonable. At around $18, the stock is trading at just 11x '08 EPS. What is more remarkable is that the company’s cash flow has been superlative, and it is trading at 5x trailing free cash flow! The company is aggressively buying back stock (almost $100Mn last quarter), so the share count is shrinking rapidly. This should provide a nice boost to reported EPS.

The stock has been flat to down over the recent past. The business isn’t the greatest in the world, but it throws off a lot of cash and the company is growing EPS at a decent rate (~10%). Short interest is high at 20% of float. A minor beat on this quarter’s estimates and a reiteration of FY guidance of $1.60-1.85 in EPS could lead to a wave of short covering, sending the stock much higher.

Fair value for AM stock: $26 (16x multiple on ‘08 EPS of $1.65)

Disclosure: Author has a long position in AM