Please note that this is a past premium recommendation. We are now out of this stock
Just in time for the holidays, I want to highlight American Greetings stock, which I believe offers a compelling value at the current prices.
American Greetings (NYSE: AM) makes and markets greeting cards (print and online), gift accessories, party goods and other specialty paper products. The company is headquartered in Cleveland, OH and was founded over 100 years ago, in 1906. The company also create and licenses intellectual property such as Care Bears and Strawberry Shortcake. AM’s brand portfolio include American Greetings, Recycled Paper Greetings, Papyrus, Carlton Cards, Gibson, Tender Thoughts, and Just For You; and Internet brands consist of AmericanGreetings.com, BlueMountain.com, Egreetings.com, Kiwee.com, Cardstore.com, and Webshots.com.
Essentially, this company and its brands are ubiquitous in the social expression sector. Chances are, if you buy a greeting card from any store in US, you are probably buying a card manufactured and marketed by AM.
Why I Like American Greetings?
Greeting cards have become an integral part of the social rituals and are likely to remain so. While the format may change from paper based to web based or instant messaging based, the market itself will not disappear. At least not overnight. American Greetings has not only embraced the internet and mobile messaging but it has also expanded its portfolio with extensions such as online photo sharing and other related products.
The company is also expanding in the international markets with its purchase of UK based Watermark Publishing Ltd on Mar 1, 2011.
Chief competitors include Hallmark Cards, which is privately held and is about 4 times the size of American Greetings in terms of revenues and CSS Industries that makes greeting cards under Paper Magic brand and has other party goods and related products.
The main attraction of American Greetings, though, lies in the valuation of its stock. As usual, I will review the balance sheet first and than we will look at its income statement. For the analysis below, the share price being used is $16.26/share, as of market close Dec 14, 2011.
The current stock price gives the company a market value of $649 million.
American Greetings has a $1.59 Billion balance sheet, broken up as follows:
Liabilities & Equity
|Cash = $209 million
Current Assets = $746 million
Long Term Assets (adjusted for depreciation) = $841 million
Goodwill/Intangibles = $29 million
|Current Liabilities = $336 million
Long Term Debt/Total Debt = $234 million
Total Liability = $787 million
Shareholders Equity = $800 million
At the current market price, the stock is trading at 0.81 times Book Value and 0.84 times Tangible Book Value. While this is attractive, it is important to note that CSS Industries also trades at a similar book multiple, although this is where the similarity ends (in terms of valuation). The company has a healthy current ratio of 2.22 and has returned an average of 12% on Equity in the last 12 months.
$209 million in cash is approximately 34% of its market value. This is nice and the long term debt is not too onerous as well. The company also has a total credit available of around $420 million, which is currently largely unused. As such, liquidity is of little concern. This is an important metric to look at for a company like American Greetings, which has a very seasonal business with clear peaks that can strain the working capital on hand.
Cash Though Will be Drained Out
The company is planning to build a new World Head Quarters in north east Ohio, which is estimated to cost $150 – $200 million. This will surely use up a good portion of the cash. The State of Ohio has kicked in $93.5 million in tax benefits to support this investment and this should show up as increased profit margins going forward. Bulk of the building expense is expected to occur in 2012.
Normally, I consider these types of expenses as vanity expenses that seldom create value for the shareholders. However, with the depressed commercial real estate markets today, this is perhaps a good time to invest in such assets that are likely to gain in value as the market normalizes.
Although the company has not given any indication, if they do decide to put some of their existing real estate on the market as they move in the new headquarters, the disposition will offset some of the cash used for the new offices.
(As a side note: I am seeing this more frequently now. Companies are choosing to invest in the real estate at this time, perhaps finding now as a great time to make such investments. If they can wrangle some sort of sweetener from the the States, all the better. Threatening to move headquarters out of state is a common tactic. Not sure whether I will judge this on moral grounds, but it certainly is good for the shareholders)
Again, with a project of this magnitude already committed to, it becomes important to make sure that the company will have sufficient liquidity and access to capital going forward. As of now, it appears that this will not be a problem.
Income Statement & Profitability Metrics
This is where most of the value in American Greetings stock shows up. The company averages a 6% net profit margin and 12% Return on Equity based on the last 4 quarters of earnings. This is a slight improvement over the previous years. The 2nd quarter 2011 also showed an 8% increase in sales and a 26% increase in operating margins compared to the Q2 year before, although it should be noted that prior year Q2 was hampered by integration costs of their Papyrus acquisition and the latest quarter was buffeted by the Papyrus related revenues/profits. Still, the Return on Equity number is quite healthy specially when you look at the current Price to Earnings ratio of 7.56 that the American Greetings stock currently trades at (I recalculated the P/E ratio after adjusting for one off items related to sale of some intellectual property in the recent quarter).
The acquisitions and dispositions have been relatively minor although the company states that it is an integral part of their growth strategy in the next year. If you net out the effect of these extraordinary items that business has been performing consistently for the past 3 years.
It is quite literally a boring old school company plodding along at the rate that it always has, doing what it always did.
The Value and How Much to Pay for the Shares
Currently CSS Industries stock sells at 17 times its earnings with a much weaker balance sheet. In normal times, American Greetings can easily command as much as 15 times earnings. With the depressed markets, and no doubt with the major capital expense on the horizon, the stock is now at half of what it should sell at. Operations wise I have no real concerns, and while they might need to access their credit lines in the next year, liquidity remains solid.
I will be willing to pay up to $20 per share for American Greetings with a target price of $30/share.
American Greetings also pays a dividend of $0.15/share per quarter which is a current yield of 3.70%. Dividend was recently increased by 7.4%. This is also a good stock to hold for investors looking for dividend, while patiently waiting for the stock price to appreciate.
I will be looking to purchase the stock in the next week if the price stays below $20 and will send out an alert when I do so.