American Greetings Case Analysis PDF

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1 American Greetings Case Analysis

American Greetings Case Analysis Whitman School of Management FIN 345 Prof. Seward

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2 American Greetings Case Analysis

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1. The shares of American Greetings are currently trading at an EBITDA multiple that is at the bottom of its peer group. Do you think a 3.5 times multiple is appropriate for American Greetings? If not, what multiple of EBITDA do you think is justified? What is the implied price per share that corresponds to that multiple?

American Greetings has been unjustifiably punished by the market, resulting in a heavily discounted stock price for the company. The EBITDA multiple, defined as the enterprise value of a company divided by the EBITDA, allows companies to be compared regardless of differences in capital structure and capital expenditures. Since American Greetings is currently trading at an EBITDA multiple at the bottom of its peer group, it can be inferred that analysts and investors believe that AG is a fundamentally worse enterprise than its competitors. However, after creating a DCF for American Greetings, it becomes apparent that the 3.5 EBITDA multiple that the company is trading at is not justified. Even when taking into account the most bearish forecasts for the company, the implied price per share is still $1.20 higher than its current price (Chart 3), which would result in a EBITDA multiple of 3.72 (Chart 3), 0.22 points above its current position. If the share price of the company were to increase, the implied enterprise value of AG would also increase, resulting in a higher EBITDA multiple. Additionally, when computing an Industry Comparable Analysis, the implied share price of American Greetings is also significantly higher than its current price. When multiplying the EBITDA multiples of its competitors by AG’s EBITDA, the implied price ranges from $12.51 - $58.66, with an average of $32.53 (Chart 1). If American Greetings’ share price were to increase, which we believe it should, it would trade at an EBITDA multiple much closer to its competitors. When taking the average of the implied

3 American Greetings Case Analysis

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EBITDA multiples from the most bearish and most bullish forecasts, American Greetings should be trading at a multiple 4.59, resulting in a $18.33 share price (Chart 1). While this multiple is still lower than the industry average, American Greetings has experience trouble growing top line revenue as well as net profit. While the company still has some potential for growth, the industry is largely in decline, which is depressing the company’s EBITDA multiple. This revised EBITDA multiple puts American Greetings closer to companies such as CSS Industries and Deluxe, which we believe are the two firms most comparable to American Greetings.

2. Model cash flows for American Greetings for fiscal years 2012-2015 based on the two sets of ratios in Case Exhibit 8. Based on the DCF associated with the forecast, what is the implied enterprise value of American Greetings and the corresponding share price?

The discounted cash flows for American Greetings can be seen in Charts 2 and 3. By using the given ratios to find the total free cash flows, we found the bullish scenario implied enterprise price to be $1,114.26, with a corresponding stock price of $22.95 (Chart 2). We found the bearish scenario implied enterprise price to be $760.07, with a corresponding stock price of $13.71 (Chart 3). For both scenarios, to find the net working capital, we divided sales by the net working turnover rate (Chart 4) and to find the fixed assets, we divided sales by the fixed asset turnover rate (Chart 4). Both of these calculations were used to find the change in NWC and fixed assets to calculate the FCF for the period. To accurately forecast the discounted cash flows, we found the WACC to be 9.05% (Chart 5). To calculate the WACC we assumed a risk free rate of 2.8%,

4 American Greetings Case Analysis

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corresponding to the 10 Year Treasury bond, due to the fact that the company has no debt due in the short term, which indicates that the long term pricing model would more accurately depict their weighted average cost of capital. The marginal tax rate, market premium, bond rating and beta were all given.

3. What do you believe to be the value of American Greetings shares? Do you recommend repurchasing shares?

We believe the per share price of American Greetings’ equity to be $18.33. This conclusion was reached by taking the average of the most bullish and most bearish analyst estimates for the company’s growth (Chart 1). While the company does not show incredible signs of growth, the risks facing the company are largely industry-specific, rather than company-specific. Once the betas of all industry competitors are unlevered, revealing the industry risk, American Greetings becomes much more similar to its peers. When comparing levered betas, AG is significantly higher than the remainder of the industry (1.63 for AG compared to 1.39 industry average) However, when the betas are unlevered, the difference becomes much less significant (1.26 for AG compared to 1.18 industry average). This suggests that the capital markets are undervaluing the price of American Greetings’ stock. Since the shares are undervalued, as management correctly believed, the company should go through with its $75 million share repurchase. In both the best and worst case DCF models, the company has a large enough free cash flows to complete this repurchase program. Even if we have inaccurately forecasted the correct share price to be $18.33, we believe the company should still partake in a share repurchase plan because even in the

5 American Greetings Case Analysis Page worst case scenario, the share price is still undervalued by $1.20 (9.59%) per share which can greatly impact the company’s performance, resulting in an undervaluation of $45.984 million. Further, we recommend that American Greetings repurchase its shares through an open market repurchase program. If the company were to use a tender offer program, they would have to pay a per-share premium to reacquire their shares. By utilizing an open market program, American Greetings can maximize the undervaluation of their stock price....