Background
American Greetings Corporation engages in the design, manufacture, and sale of greeting cards and other social expression products worldwide. It offers everyday and seasonal greeting cards, gift wrap, party goods, stationery, and giftware, as well as custom display fixtures for its products and products of others. The company, through its subsidiary, AG Interactive, Inc., distributes social expression products, including email greetings, personalized printable greeting cards, and a range of graphics through digital and other electronic channels, including Web sites, Internet portals, instant messaging services, and electronic mobile devices. Its customers include mass merchandisers, drug stores, and supermarket chains. As of August 24, 2007, the company owned and operated 429 card and gift retail stores in North America. The company was founded in 1906 and is headquartered in Cleveland, Ohio.
Corporate Overview
AM's North American and International Social Expression Products segments design, manufacture and sell everyday and seasonal greeting cards (under the American Greetings, Carlton Cards and Gibson brands in the U.S.) and other related products mainly through mass retail, which includes mass merchandisers, chain drug stores and supermarkets. Wal-Mart accounted for 17% of FY 07(Jan.) net sales, up from 16% in FY 06. The company's Retail Operations segment owns and operates 436 card and gift retail stores in the U.S. and Canada that are primarily located in malls and strip shopping centers. AG Interactive markets e-mail greetings, personalized printable greeting cards, and other social expression products through AM'sWeb sites (www.americangreetings.com, www.bluemountain.com and www.egreetings.com), co-brandedWeb sites, and on-line services. The segment's AG Mobile unit, launched in FY 05, distributes social expression content through wireless platforms (e.g., ringtones for cellular phones). AM is additionally involved in design licensing and character licensing through its AGC Inc. and Those Characters From Cleveland Inc. subsidiaries, and in the development and production of original family and children's entertainment through its 50% interest in The Hatchery, LLC.
While there are an estimated 3,000 greeting card publishers in the U.S., the company considers itself to be only one of two main suppliers offering a full line of social expression products. AM's main competitor is Hallmark Cards, Inc. The two companies have a combined market share of about 85%. Hallmark, with 2006 net revenues of $4.1 billion, is the industry leader. AM holds the number two industry position and is the largest publicly owned greeting card company.
Corporate Strategy
Over the past several years, AM has restructured its business processes in an effortto increase retail productivity and throughput, reduce costs, and enhance customer relationships. The company has focused on four key initiatives: cutting costs -- rationalizing brands, product lines and facilities; supply chain transformation -- improving product development, sourcing and delivery systems; category innovation -- extending core competencies and evolving the product line to create new opportunities; and strategic account management -- becoming a customer- and consumer-driven organization. As a next step in reviving its business, AM has committed at least $100 million over three years toward
converting customers to its scan-based trading (SBT) model, refreshing product in the retail pipeline, and improving product merchandising, including new and enhanced display fixtures. As of February 28, 2007, the company had converted three of its five largest customers to SBT. With SBT, AM provides products to the customer on a consignment basis, retaining legal ownership of the inventory at the customer's retail
stores. Sales are recorded at the time a product is electronically scanned through the retailer's cash register. In a further effort to improve company fundamentals, AM announced a capital restructuring plan for FY 07 that has included the retirement of $277.3 million of the company's 6.1% senior notes, the issuance of $200 million of 7.375% senior unsecured notes, an increase in AM's total senior credit facility from $200 million to $650 million, and the exchange of the company's 7.00% subordinated convertible notes that could only be settled with stock with a new series of 7.00% subordinated convertible notes that can be settled in both cash and stock. AM completed a $100 million share buyback program in the fourth quarter of FY 07 and implemented a new $100 million buyback in April. Consistent with its strategy to return value to shareholders, management increased the dividend 25%, to $0.10 per share, for a recent yield of around 2.0%.
Opinion on Valuation
Let me start by saying that AM is not really an earnings story. It is not even a growth story, as sales have been actually decreasing as they have restructured their business. It is a restructuring/future free cash flow story. The company has recently gone through a massive restructuring strategy in an effort to concentrate on its core businesses. The company has adopted a very shareholder friendly plan of dividend increases and massive share buybacks. It is able to do this through the large amount of Free Cash Flow that the company generates. The current run rate on FCF is currently near $220 million/year. This for a company with a market cap. of nearly $1 Billion. The company recently reduced its future interest expense by paying off a large amount of debt which will boost EPS next year.
But as I said this is a FCF story (and how the company is redeploying it), and the company is using it to greatly increased dividends and an impressive amount of share buybacks. By my estimates of future FCF at near $220 million and using a high 10% discount rate at 0% growth over the next 10 years and 0% growth thereafter, the company is trading at 50% of its intrinsic value. Giving it an expected return of 100% in movement to intrinsic value.
The company first caught my attention when famed investor, Michael Price took a large stake in this little company. It is currently one of his larger holdings. There is also a dated Motley Fool article that provides some insight, Appropriately titled "Earnings and Noise From a Cash Cow": http://www.fool.com/investing/value/2007/04/18/ear...
The company has recently used a portion of their FCF this past year to make a few small acquisition in the interactive card department via its subsidiary AG interactive in an effort to leverage their brand name with popular websites such as MySpace and Facebook in an effort to bring in low cost advertising revenues.
http://www.bloggingstocks.com/2008/01/24/american-...
I'd love to hear some opinions on this boring, non-growth company. In particular in regards to future FCF.
Regards,
Frankiwa
American Greetings Corporation engages in the design, manufacture, and sale of greeting cards and other social expression products worldwide. It offers everyday and seasonal greeting cards, gift wrap, party goods, stationery, and giftware, as well as custom display fixtures for its products and products of others. The company, through its subsidiary, AG Interactive, Inc., distributes social expression products, including email greetings, personalized printable greeting cards, and a range of graphics through digital and other electronic channels, including Web sites, Internet portals, instant messaging services, and electronic mobile devices. Its customers include mass merchandisers, drug stores, and supermarket chains. As of August 24, 2007, the company owned and operated 429 card and gift retail stores in North America. The company was founded in 1906 and is headquartered in Cleveland, Ohio.
Corporate Overview
AM's North American and International Social Expression Products segments design, manufacture and sell everyday and seasonal greeting cards (under the American Greetings, Carlton Cards and Gibson brands in the U.S.) and other related products mainly through mass retail, which includes mass merchandisers, chain drug stores and supermarkets. Wal-Mart accounted for 17% of FY 07(Jan.) net sales, up from 16% in FY 06. The company's Retail Operations segment owns and operates 436 card and gift retail stores in the U.S. and Canada that are primarily located in malls and strip shopping centers. AG Interactive markets e-mail greetings, personalized printable greeting cards, and other social expression products through AM'sWeb sites (www.americangreetings.com, www.bluemountain.com and www.egreetings.com), co-brandedWeb sites, and on-line services. The segment's AG Mobile unit, launched in FY 05, distributes social expression content through wireless platforms (e.g., ringtones for cellular phones). AM is additionally involved in design licensing and character licensing through its AGC Inc. and Those Characters From Cleveland Inc. subsidiaries, and in the development and production of original family and children's entertainment through its 50% interest in The Hatchery, LLC.
While there are an estimated 3,000 greeting card publishers in the U.S., the company considers itself to be only one of two main suppliers offering a full line of social expression products. AM's main competitor is Hallmark Cards, Inc. The two companies have a combined market share of about 85%. Hallmark, with 2006 net revenues of $4.1 billion, is the industry leader. AM holds the number two industry position and is the largest publicly owned greeting card company.
Corporate Strategy
Over the past several years, AM has restructured its business processes in an effortto increase retail productivity and throughput, reduce costs, and enhance customer relationships. The company has focused on four key initiatives: cutting costs -- rationalizing brands, product lines and facilities; supply chain transformation -- improving product development, sourcing and delivery systems; category innovation -- extending core competencies and evolving the product line to create new opportunities; and strategic account management -- becoming a customer- and consumer-driven organization. As a next step in reviving its business, AM has committed at least $100 million over three years toward
converting customers to its scan-based trading (SBT) model, refreshing product in the retail pipeline, and improving product merchandising, including new and enhanced display fixtures. As of February 28, 2007, the company had converted three of its five largest customers to SBT. With SBT, AM provides products to the customer on a consignment basis, retaining legal ownership of the inventory at the customer's retail
stores. Sales are recorded at the time a product is electronically scanned through the retailer's cash register. In a further effort to improve company fundamentals, AM announced a capital restructuring plan for FY 07 that has included the retirement of $277.3 million of the company's 6.1% senior notes, the issuance of $200 million of 7.375% senior unsecured notes, an increase in AM's total senior credit facility from $200 million to $650 million, and the exchange of the company's 7.00% subordinated convertible notes that could only be settled with stock with a new series of 7.00% subordinated convertible notes that can be settled in both cash and stock. AM completed a $100 million share buyback program in the fourth quarter of FY 07 and implemented a new $100 million buyback in April. Consistent with its strategy to return value to shareholders, management increased the dividend 25%, to $0.10 per share, for a recent yield of around 2.0%.
Opinion on Valuation
Let me start by saying that AM is not really an earnings story. It is not even a growth story, as sales have been actually decreasing as they have restructured their business. It is a restructuring/future free cash flow story. The company has recently gone through a massive restructuring strategy in an effort to concentrate on its core businesses. The company has adopted a very shareholder friendly plan of dividend increases and massive share buybacks. It is able to do this through the large amount of Free Cash Flow that the company generates. The current run rate on FCF is currently near $220 million/year. This for a company with a market cap. of nearly $1 Billion. The company recently reduced its future interest expense by paying off a large amount of debt which will boost EPS next year.
But as I said this is a FCF story (and how the company is redeploying it), and the company is using it to greatly increased dividends and an impressive amount of share buybacks. By my estimates of future FCF at near $220 million and using a high 10% discount rate at 0% growth over the next 10 years and 0% growth thereafter, the company is trading at 50% of its intrinsic value. Giving it an expected return of 100% in movement to intrinsic value.
The company first caught my attention when famed investor, Michael Price took a large stake in this little company. It is currently one of his larger holdings. There is also a dated Motley Fool article that provides some insight, Appropriately titled "Earnings and Noise From a Cash Cow": http://www.fool.com/investing/value/2007/04/18/ear...
The company has recently used a portion of their FCF this past year to make a few small acquisition in the interactive card department via its subsidiary AG interactive in an effort to leverage their brand name with popular websites such as MySpace and Facebook in an effort to bring in low cost advertising revenues.
http://www.bloggingstocks.com/2008/01/24/american-...
I'd love to hear some opinions on this boring, non-growth company. In particular in regards to future FCF.
Regards,
Frankiwa
