American Greetings Exec Summary Essay

529 words - 3 pages

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 ...view middle of the document...

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
2014 71.77 4
2015 70.16 5
Discounted Cash Flow (millions) Period
2011 112.33 1
2012 75.12 2
2013 73.43 3
2014 71.77 4
2015 70.16 5

DCF is our estimate of the present value of American Greetings’ enterprise value. We used DCF numbers divided by estimated shares outstanding of 40 million to generate the following price per share (PPS = DCF / shares outstanding):
Price Per Share
2011 2.92
2012 1.88
2013 1.84
2014 1.79
2015 1.75
Price Per Share
2011 2.92
2012 1.88
2013 1.84
2014 1.79
2015 1.75

Recommendation

Based on our calculations and forecasts for American Greetings from 2012 to 2015, we do not recommend share repurchase. Had our valuation been greater than the $12.50 share price at the end of 2011, such a repurchase would be worthwhile. However, price per share as computed above is far below $12.50.

It seems like more than just short term tough times for American Greetings, and the wisest thing to do would be to hold onto available cash in preparation and anticipation of continued and increasing financial and economic difficulty.

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