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American Greetings Executive Summary – Fin 3717

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American Greetings Exec Summary

Tyler Reames October 14, 2013
American Greetings Executive Summary – FIN 3717

Executive Summary

American Greetings is the second largest greeting card publisher in the U.S., behind Hallmark. The company is involved in retail and online sales.

Hallmark is the main competition for American Greetings. In recent years, social media has caused a decline in the greeting card industry. Both American Greetings and Hallmark have begun creating electronic cards to take advantage of the digital revolution.

Problem

By the end of 2012, American Greetings was at the bottom of its peer group, with a low EV-EBITDA multiple, market-to-book below 1, a 6x PE ratio, and a share price of $12.51 that had dropped significantly in the months prior.

American Greetings has historically used a share repurchase strategy in times of low equity. This is a good defense if the stock price is down temporarily, but the low valuation could also be a sign of larger trouble where it would be wise to preserve cash.

Both S&P and Value Line anticipated modest growth for American Greetings in the coming years.

Analysis

We conducted an analysis for 2012 through 2015 to determine the value of the company. Our analysis began with calculating the operating cash flows (OCF = operating income * (1 – 0.4) - ∆NWC):
Operating Cash Flow (millions)
2011 118
2012 83
2013 86
2014 88
2015 91
Operating Cash Flow (millions)
2011 118
2012 83
2013 86
2014 88
2015 91

We then determined a WACC of 5.37% based on a cost of equity of 8.85% (calculated with beta of 1.76, risk fee rate of 0.05%, and market risk premium of 5%) and estimated the cost of debt at 6%.

Then, we calculated the discounted cash flows (DCF = OCF / (1 + WACC)^Period):
Discounted Cash Flow (millions) Period
2011 112.33 1
2012 75.12 2
2013 73.43 3

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...Chandler Loupe Oct. 13th, 2013 FIN 3717 Stephens American Greetings- Executive Summary On a warm New Years day in Cleveland, American Greetings management was reviewing its stock’s recent downward trend of being cut in half over the past several months. When faced with situations of low equity valuation, AG’s management team normally opted to buyback; and given the circumstances, they were considering a $75 million repurchase program. As the second largest greeting card publisher, they positioned themselves as a leader in social expression products through a number of new business facets such as: electronically selling greetings, owning a number of different brands aside from AG, and licensing popular characters they owned the rights to. Problem The biggest issue facing the company was the overall decline in the greeting card industry. Industry analysts had concluded that their market had contracted by 9% since 2005, and that the trend would continue. The Mintel industry analyst firm had a best-case scenario of a 4% decline over the next four years, and a worst-case scenario of 16%. Analysis Although their market appears to be at a steady decline, their 2011 fiscal year shows a few signs of improvement. As seen in Exhibit 2, their international social expression products net sales increased by 31%, greeting cards by 9%, and gift packaging by 7%. Aside from small gains in revenue, their weighted average cost of capital has been fairly steady the past 3 years. By using...

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