Marilyn Barnett Finc 4300W November 20th, 2017 Professor Glambosky
American Greetings Case
1. What is going on at American Greetings? Founded in 1906 as a small Cleveland wholesale shop, American Greetings Corporation, which advertises itself as “the world’s largest publicly owned creator, manufacturer, and distributor of social expression products,” is second only to
Hallmark Cards, Inc., which is a privately held corporation, in the increasingly competitive and tight-margin greeting card industry. The company's main U.S. greeting card brands are Carlton Cards, American Greetings, and Gibson, the latter having been acquired in 2000; the sale of everyday and seasonal greeting cards generates more than 55 percent of total revenues. Other product lines include DesignWare party goods, GuildHouse candles, and Designers' Collection stationery. Among the firm's domestic subsidiaries are Plus Mark, Inc. (gift wrap), Magnivision, Inc. (reading glasses), Learning Horizons, Horiz ons, Inc. (supplemental educational products), and A.G. Industries, Inc. (display fixtures). Another subsidiary, Carlton Cards Retail, Inc., owns and operates about 600 card and gifts shops in the United States and Canada. The majority-owned AmericanGreetings.com, Inc. subsidiary markets online greeting cards and related products through several web sites and Internet services. American Greetings also creates, markets, and licenses characters, including the Care Bears, Holly Hobbie, and Strawberry Shortcake. Non-U.S. subsidiaries operate in Canada, Mexico, the United Kingdom, South Africa, Australia, New Zealand, and Malaysia, and American Greetings distributes its products through a network of more than 125,000 retail outlets in more than 70 countries. About 18 percent of sales originate outside the United States. 2. The shares of American Greetings are currently trading at an EBITDA multiple that is a t the bottom of its peer group. Do you think a 3.5 times multiple is appropriate for American Greetings? If not, what multiple multiple of EBITDA do you think is justified? What is the implied share share price that corresponds to that multiple? Shares of American Greetings are currently trading at an EBITDA multiple while the average for comparable firms is 7.5. EBITDA has shown little to no growth in recent years. The company is undervalued because the prospects and plans of American Greetings growth has been shifted into technology and that the EBITDA multiple should be closer to 5x. The cause of the low multiple is the recent 50% decline in share price. This decline in share price cut the company’s market cap in half therefore hurting their
enterprise value and EBITDA multiple. Shares were trading at an average of $23 through 2010 and 2011. Given a share price of $23 holding all else constant their EBITDA multiple would be at a more justifiable 5x. The importance in the decrease in market cap rather than the amount of debt is clearer when you use market cap / EBITDA for comparable firms. Their market value / EBITDA is 2.3 while comparable firms average at 6.7. It is highly unlikely or justifiable for American Greetings EBITDA multiple to reach the average of 7.5. In order to do so, share prices
would have to increase 200% to $36. They could also issue $1 billion in debt or cut their EBITDA by 60%, none of which would be good for the firm. American Greetings currently has $86 million in total cash. Spending this cash would directly increase the EBITDA multiple but not by much. Spending this cash could possibly direct the multiple indirectly through market cap appreciation if it is spent wisely. The firm should spend $75 million in share repurchases in order to boost share prices and therefore returning the EBITDA multiple to a more justifiable level. 3. Please model cash flows for American Greetings for f iscal years 2012 through 2015. Using a marginal tax rate of 40% and a market risk premium of 5%, what is your estimate of the appropriate discount rate for the free cash flow forecast? Based on a discounted cash flow model, what is your best estimate of the implied enterprise value of American Greetings and the corresponding share price?
Sales Growth EBIT Less: Income Tax (40%)
Plus: Depreciation Less: Change in NWC Less: Change in Fixed Assets
FCF Terminal Value Total FCF
2011
2012
2013
2014
2015
Long-Term Growth
1,677
1,694 1% 152
1,719 1.5% 155
1,754 2% 158
1,798 2.5% 162
1,851 3% 167
61
62
63
65
67
0
0
0
0
0
-52
-18
-14
-11
7
9 135
13 98
18 91
22 85
28 65 1,223
135
Operating Margin Tax Rate Terminal Growth Rate Shares Outstanding WACC Value of Firm Value of Debt Value of Equity Stock Price
98
91
1,309
9% 40% 3% 38.50 8.49% $1,223.40 235 $988.76 $25.68
American Greetings sales would rise to a long-term high of 3% and the company’s operating margin would be steady at 9%. Using the company’s WACC of 8.49% as their discount rate, the
NPV of the company is $1223(MM) with a stock price of $25.64
4. What are the key drivers of value in your model? Free cash flow forecasts, WACC, and the terminal value because that is how you find out the debt and equity and share price. Do you recommend repurchasing shares? Yes, if the company is optimistic about the future of the business.
