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American Greetings Corp. and the Triple “W”
Posted by: Amvona (IP Logged)
Date: January 5, 2012 04:07PM
On December 22nd, 2011 we began purchasing shares of American Greetings Corp. (AM) at $12.91 per share for investors. To our surprise we were able to get several more large blocks of the shares in extended hours trade yesterday evening (Jan. 4th, 2012) for the same accounts.
We’re thrilled that as of the writing of this article, the price has actually gone done even further (explained below). We like to think of the stock as having three possible outcomes for buyers in our time frame:
a) The price goes up and the shareholders Win
(Simple equity appreciation)
b) The price goes down and the shareholders Win
(Increased share repurchases and related improvement in earnings metrics)
c) The price doesn’t move and the shareholders Win
(High dividend and real estate give away)
Because of the great volatility in potential outcomes involved we affectionately refer to it as the “Win-Win-Win” or Triple “W” stock. We think it will have special appeal to those who confuse “Beta” with “risk”.
Our original purchases followed a rather precipitous (25%) decline in the share price from the December 21st closing price and an overall decline of some 50% in the share price since the beginning of 2011.
When the share repurchases over the years are taken into account the price of the issue has effectively declined about 75% since its mid 2007 highs. This share-adjusted decline is rather extraordinary given the fact that the tangible net worth in the company is actually higher now than it was then, but again this figure, much like the adjusted per-share book value is not immediately evident. This is largely because of a large write-down in intangibles taken in 2009. If intangibles were overstated in 2009, they are now understated, a presentation we prefer, given our preference for tangible assets.
Growth in equity in recent years
Year Delta Equity
2008 -7% $943,000,000
2009 -44% $529,000,000
2010 23% $651,000,000
2011 17% $764,000,000
2012 through Q3 0% $766,977,000
12 month forecast $871,311,316
Avg 2010-2012: 14%
Avg. w/ dividend: 18%
BV per share (1 yr.) $22.07
Growth in “Per Share Book Value” in the same period
Year Delta BV per share
2008 0% $17.46
2009 -36% $11.26
2010 48% $16.69
2011 14% $19.10
2012 through Q3 2% $19.43
BV per share (1 yr.) $23.76
Avg 2010-2012: 21%
Avg. w/ dividend: 26%
The business does not immediately meet the criteria of a traditional “value” investment, at least not from a “Net Working Capital” perspective (their “net working capital” position is negative), but we are very excited to own the shares nonetheless because the company does have very positive stats at the current price and more security in the assets backing the issue than may be immediately obvious to the casual observer.
1. In the twelve months running up to the most recent earnings announcement, the company threw off about 90 mln. In free cash from operations, which represents about 20% of the market cap.
2. Net income available to the common is ~83 mln. In the same time frame, or about 18% of the market cap (representing about 100% return of the buyers investment in about 4 years’ time when taken together with the nearly 5% annual dividend)
3. These figures mean a rather low trialing Price to Earnings ratio of only ~6.3 and while we don’t typically ascribe to forward P/E ratios’ we do believe AM will hit their future targets, and so the ~6 figure for future P/E seems acceptable.
4. Finally we are left with an Enterprise Value/EBITDA (ttm) of only 3.22 and a tiny Price/Book (mrq) of only .64 (Actually much less when the present market value of certain assets is considered)
Now as good as the metrics are above, they are actually understated. Items 1 through 3 (the earnings derivatives) are all about to change. Yesterday after close of market the company announced another 75 mln. share repurchase program. The last share repurchase program was announced in 2009 and was also for 75 million, with the last tranche (revealed in the Q3 2012 earnings release) removing another 2 mln. shares from the open market.
At the current price, the new program has the potential to take back an additional 15% of the remaining shares (about 6 mln.) over and above the ~50% already taken off the market over the last seven years. These are large, aggressive and very share holder friendly actions, the impact of which the average investor may not fully appreciate.
The average retail or passive (defensive) investor may not always asses the dynamics of these finer points (which have nothing to do with the all-important “sales trends” most obsess on). Larger money managers who may be more savvy in this respect are likely to find the company is simply too small to make a meaningful investment in. However, for the third mutation of the species, the “enterprising” value oriented investor “there's gold in them thar' mountains”.
Share repurchase math for recent years:
Year Number of Shares decrease
2008 54000000 -6.90%
2009 47000000 -12.96%
2010 39000000 -17.02%
2011 40000000 2.56%
2012 Q3 39480798 -1.30%
1 Yr. forecast 36668605 -7.12%
On average the company has repurchased just over 7% of their own shares per annum in recent years, a trend which is now assured to continue, and would indicate some ~36.6 mln. shares outstanding in the next 12 months. However it may be fair to forecast an even small number outstanding by this time next year. We reason this, because the company was willing to pay an average price of $17.25 per share (34.5 mln.) to accumulate the 2 mln. shares they took back in Q3 2012 alone, so we think it is likely they would be out buying aggressively when the stock is presently below $13. All that the enterprising investor needs to do then, particularly if the earnings coefficients are more important than the statement of assets, is recalculate points 1 -3 above with the new divisor (call it 35 mln. shares).
This taken with the unusually high dividend is something like getting a free derivative hedge for recent buyers. Here are two scenarios:
The "hoped for" scenario of the average short-term investor - the price goes up
Owners of the company’s common shares (unlike senior secured debt holders) have an increase in the value of their holdings, which as marketable securities can be realized at any time. In the meantime, a 5% dividend should assuage the seemingly “long-sufferings” of the impatient.
The less obvious "enterprising" scenario - the price goes down
The company will be out buying shares at a lower price (thus stretching the dollars so to speak), and increasing not only per share future earnings for existing owners, but also increasing (without any further capital outlay), their pro-rata share of the company. If you’re an owner and don’t mind being a little patient, then nothing can be better than a decline in the price of the shares because, much like a derivative hedge (and a free one), owners are actually getting paid for a decline in the share price, but unlike an owner of derivatives, can focus on the full benefits of real and direct ownership in a long standing profitable company.
Good news for the Hard Core balance sheet investors
Anyone who reads the Amvona blog knows that we are not big fans of real estate – we just think an investor shouldn’t buy something that they will never really own.
However, considering ourselves to be reasonable, we are willing to make exceptions, particularly in the case where the real estate was acquired prior to the 2002-2007 era (or 'the good old days' when Ponzi schemes using real estate was all the rage), and when the price is, well, free as is the case in AM.
American Greetings, in their own GAAP’ish way books their assets at Cost, including their real estate. This becomes especially noteworthy when talking about a 105 year old company.
The undervaluation of the real estate on the balance sheet provides greater security than the casual observer may at first realize. ~9.1 sq. feet of commercial space booked at 188 mln. as of FYE 2011 comes to about $20 per square foot. We are not sure on what planet open warehouse space (let alone office) could be built for less than $50 (land costs aside). If this conclusion is accurate than $188 mln. represents less than 40% of the potential value (and in all likelihood much less). So there may be more than $200 mln. in additional tangible value not represented on the balance sheet.
In rough figures $200 mln. in real estate (conservative), divided by 35 mln. shares (also conservative), is an additional ~$5.70 per share in missing tangible book value. If that was added to the current book value of $19.43 (which is also almost all tangible thanks to the 2009 write-down), than the real book value may be north of $25 making the actual P/B ratio much closer to .50 than the stated .65 – that is to say more than an adequate margin of safety or the proverbial “dollar for .50 cents”.
Chief Executive Officer Zev Weiss said in his recent announcement: "We remain committed to our product leadership strategy and recognize that, at times, it may temporarily create volatility in our financial performance. As demonstrated by today's announcement of a new share repurchase authorization, we believe that our current stock price is undervalued."
We couldn’t agree more Zev!
Stocks Discussed: AM,
Re American Greetings Corp and the Triple W
Posted by: Matt Blecker (IP Logged)
Date: January 6, 2012 12:03PM
Nice article. Clearly, you performed in-depth research.
A few observations:
1) Tangible Book Value could be less than you say because:
a) Prepaid expenses are not tangible and will eventually be eliminated as an asset
b) Deferred Taxes are also technically not part of liquidation value. This should be emphasized as past tax issues are troubling.
c) Exercisable options coud slightly adjust the share count, especially at higher prices
d) The stated value of other assets is not a certainty
Adjusted for the first two factors, tangible book value is closer to:
Shareholder's equity as of latest 10Q 766,977
Intangible adjustments Goodwill 27,713
Deferred taxes - Current 57,400
Defered taxes - Long-Term 128,595
Prepaid expenses - 127,376
Tangible Book Value (could be lower if more specifics were given for "other assets" and b/c of inventory and other factors) 425,893
Diluted Shares Outstanding 40.437 million according to latest 10Q (Could be fewer after further share repurchases)
Per Share 10.53
I agree the real estate is undervalued and reasonably there is another $5 in value per share (based on $50 per sq ft)
This would put book value at 15.53, however a lot of that value is questionable b/c of other assets, inventories, etc....
2) Perhaps the increase in cap ex is not permanent, but even if cap ex is lower next year, cash flow from operations the first part of this year was much worse than the first part of last year.
3) Gross margins have contracted due to a different sales mix
4) From Ernst and Young in the latest 10K
"In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, American Greetings Corporation has not maintained effective internal control over financial reporting as of February 28, 2011, based on the COSO criteria."
Stocks Discussed: AM,