Individual Case 1

American Greetings

American Greetings Case Study

Executive Summary

With the world experiencing fast technological advancements, there has been a vast change in
how people interact with one another. Traditionally, people used cards to express love on
special occasions such as birthdays, graduation, or sympathy to the loss of a loved one. With
technology advancement and new market opportunities, card companies have been forced to
innovate and change their strategies to remain competitive in the market. The Greeting card
industry is increasingly competitive and tight margins posing a challenge to American
Greetings Company.
American Greetings Corporation is a company that was established in the American market
in 1906. In the United States, American Greetings Corporation is currently the second-largest
card-manufacturing company in the industry. The company is one of those trying to continue
to innovate and embrace technological advancement. Customers are now using digital
alternatives to communicate and interact with others. Similarly the customers are using
picture messages on most platforms for social media. This makes innovation critical for the
card companies to avoid being irrelevant in the market.
Card companies are now trying to establish an online presence with the card market
decreasing to an all-time low. American Greetings stock price has been falling, and the top
management of the company are looking for strategies to get that price up. The company has
75 million dollars to either buy back shares or hold on to that 75 million for future needs.
One problem with American Greetings is the fact that the card market is decreasing as
alternatives continue to grow in the digital card market. The market trajectory does not point
towards greeting cards stability. There has been an additional incentive to repurchase stock
and as such I believe American Greetings should buy back shares. With a bullish market
scenario, the stock price will be undervalued.
Individual Case 1
American Greetings

Overview
As technology keeps on improving daily and continuing to be an important part of the day to

day operations, card companies need to continue to innovate to stay relevant and competitive

in the market. American Greetings is BB+ rated company looking to increase the stock price.

The American Greetings management have decided to spend a lot of money on marketing

and innovation, which is helping sales grow considerably.

American Greetings is changing its market strategy and has established an online presence as

well as digital cards to move with market and industry trends. They have 75 million dollars to

either hold on to or buy back shares of the company if they believe these shares are

undervalued.

Statement of the Problem(s)

American Greetings share price has been dropping constantly. Significant problems that

American Greetings is experiencing is the market for card makers and card companies

decreasing every day. Another problem for the card-manufacturing company is the price per

share dropping as well as spending so much money marketing their products and services.

American Greetings does not have a competitive advantage in the market. This makes it hard

for the company to compete with Hallmark Company which has a strong brand and presence

in the international markets. The company is trying to innovate to compete with new market

trends. Industry analyst forecast of a continual decline makes it hard for American Greetings

to raise the market share price. The top management has responded by creating online

storefronts to deal with changes in consumer purchasing patterns.

Individual Case 1
American Greetings

Analysis

The minimum return that is acceptable to the investors of American Greetings Company can

be equated to the company’s WACC. WACC can be achieved by multiplying the cost of debt

with the weight of debt of the company plus cost of equity multiply with the weight of equity.

Currently, the WACC of American Greetings is estimated to be around 9.7%. If the

management of American Greetings implements the buyback strategy, the present value of

WACC is likely to be changed because of the changes in the capital structure.

By using the average EBITDA multiple of the industry, the share price of American

Greetings is approximately $32.54. The average multiple of EBITDA of the firms which are

in operation in the greeting card industry publishing sector is about 7.4 times, while the

multiple of EBITDA of American Greetings Company is almost $204.2m. The equity and the

enterprise values of American Greetings Company are $1246m and 1481m respectively.

American Greetings Company share price of as per the average multiple of EBITDA is

higher than the share price currently which means that the shares of the company are trading

at a lower value. The top management of the company should consider the share repurchase

option to rectify the problem.

American Greeting Price earnings ratio is six times whereas the earnings per share is $2.22.

The company’s share price is currently $13.33 per share. Using the P/E ratio method, the

share price is also marginally bigger compared to the actual amount on which the shares are

trading.

Under bullish scenario, the earnings per share is slightly favourable for company. However,

under the bearish scenario the earnings per share is significantly low especially during 2014

and 2015. The major explanation for this is the favourable growth prospects in the bullish
Individual Case 1
American Greetings

scenario in terms of the operating profits and sales, as small decrease in the sales growth and

profit from operations might vastly alter free cash flows and earnings per share.

Recommendations

The management of American Greetings assumed that if the reduction in share price is a

short term effect, then the repurchase option will increase the share price. There has been an

additional incentive to repurchase stock and as such I believe American Greetings should buy

back shares. With a bullish market scenario, the stock price will be undervalued. There is an

optimistic view of business operations under the bullish scenario and using optimistic

conditions, future cash flows can be forecasted. The future cash flows of American Greetings

Company are expected to grow under the bullish approach. The opposite occurs under the

bearish scenario where there is a pessimistic view of business operations. The conditions used

to forecast the future cash flows of American Greetings are less favourable. However, under

the bearish scenario the future sales are forecasted to remain constant, meanwhile, the

margins of operations are also forecasted to reduce considerably. 

Individual Case 1
American Greetings

Appendices

Exhibits

         
Bond
  ROA ROE Beta Rating**
         
American Greetings 7% 11% 1.63 BB+
Blyth 4% 9% 1.60 B
Consolidated
Graphics 5% 10% 1.45 BB
CSS Industries 4% 2% 1.36  
Deluxe 13% 55% 1.85 B
Hallmark NA NA NA  
Lancaster Colony 14% 19% 0.42  
Meredith 7% 15% 1.75 BB
Scholastic 6% 8% 1.04 BB-
         
* EBITDA multiple
is defined as
Enterprise Value
divided by EBITDA.        

Shares
Share Outstandin Total Total
  Price g Cash Debt
         
American Greetings 12.51 38.3 86 235
Blyth 56.80 8.2 182 101
Consolidated
Graphics 48.28 10.2 7 197
CSS Industries 19.92 9.7 10 0
Deluxe 22.76 50.9 31 742
Hallmark NA NA NA NA
Lancaster Colony 69.34 27.3 162 0
Meredith 32.65 44.8 26 250
Scholastic 29.97 31.1 114 215
Individual Case 1
American Greetings

EBITD
A
Enterpri Revenu EBITD Multiple
se Value e A *

714 1,660 204 3.5

568 984 48 11.7
692 1,050 122 5.6
194 453 30 6.5
1,901 1,420 359 5.3
NA 4,100 NA NA
1,890 1,090 156 12.2
1,712 1,350 240 7.1
1,145 1,950 189 6.0

2005 2006 2007 2008 2009 2010 2011

Revenue Growth 0% -7% -1% -5% -3% -2% 7%
Operating Margin 8% 2% 5% -1% 6% 9% 9%
Individual Case 1
American Greetings

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%
2005 2006 2007 2008 2009 2010 2011

Revenue Growth Operating Margin

Individual Case 1
American Greetings

    Exhibit 8      
    AMERICAN GREETINGS      
Financial Forecast
    Assumptions      
           
           
  Actual Forecast      
  2011 2012 2013 2014 2015
Bullish Scenario          
Revenue Growth 5.3% 1.0% 1.5% 2.0% 2.5%
Operating Margin 9.4% 9.0% 9.0% 9.0% 9.0%
Net Working Capital
Turnover 5.02 6.00 6.50 7.00 7.50
Fixed Asset Turnover 1.95 1.95 1.95 1.95 1.95
 
Bearish Scenario
Revenue Growth 5.3% 0.0% 0.0% 0.0% 0.0%
Operating Margin 9.4% 8.0% 7.0% 6.0% 5.0%
Net Working Capital
Turnover 5.02 6.00 6.50 7.00 7.50
Fixed Asset Turnover 1.95 1.95 1.95 1.95 1.95