American Greetings: Mea Culpa

Jun.26.08 | About: American Greetings (AM-OLD)

American Greetings (NYSE:AM-OLD) reported earnings on Wednesday, Jun 25 (see conference call transcript). The company exceeded revenue estimates for the quarter, but fell far short on EPS. It blamed roll-out costs for a new card line in Canada. This was a disappointing performance, as competent management would have controlled the costs, or at the very least flagged the impending increase in costs in the last quarterly call.

So it is time for a mea culpa. Clearly, I was wrong in recommending the stock ahead of its earnings report ("American Greetings Looks Like a Buy Ahead of Earnings"). I had been comforted by the company’s healthy cash flow, and was vindicated by the beat on revenues, but the discretionary increase in expenses came as a complete surprise.

Curiously, despite the EPS miss, the company maintained its FY guidance of $1.65-1.80 in EPS. This is perplexing, and now looks like a stretch to achieve. Maybe management just has their head in the sand, or maybe they have a trick up their sleeve. It is hard to tell. Clearly, the market has taken a “shoot first, ask questions later” approach, driving the stock down to 8x this year’s EPS guidance. That includes me – I got out of my position as I do not have faith in the company's management and believe the company will miss their FY guidance.

Disclosure: Author has no position in AM stock