American Greetings Corp. makes traditional greeting cards, gift wraps and party goods. It sells its products mainly through super market stores, Wal-Mart and Target stores. The company derives majority of its revenue and earnings from physical products. However, in recent years, the company developed and acquired many internet properties such as: AmericanGreetings.com, BlueMountain.com, Egreetings.com, Kiwee.com, PhotoWorks.com and WebShots.com to offer their eproducts.
Because of its heavy reliance on the traditional products and distribution channels, the company is products are perceived to be obsolete over time. As a result, the stock attracted a lot of short sellers: 22.6% of the total float!
Is the company fading away any time soon?
Given the rage of the internet, one would expect their business be fading fast. In reality, it was not so clear! In fact, their total greeting card business grew by 7.5% (7% due to volume and 0.4% due to price) during their fiscal 2010 year ending February of 2010. Their latest quarter ending November 26, 2010 showed a flat year over year growth, excluding diversified party goods business. In the past 5 years, their total revenue only declined about 3.3% a year. It is safe to say that their business is not going to fade away any time soon. Their business is not exciting, but it certainly beats PCs where price erosion is much greater.
Valuation
The company is expected to earn about $2.44 a share for their current fiscal year ending February of 2011. As of the end of November, 2010, it has a tangible book value of $673 million, which increased by $104 million from 2009. At $22.3 a share, it trading at a multiple of 9.1 and a price to tangible book ratio of 1.32. It also increased its quarterly dividend from 12c to 14c to an annual yield of 2.5%. Assuming the company's business is stable, an investor is getting paid to wait. I believe the downside is limited, and upside is substantial as well.
Shareholder Friendly Management
American Greetings has been a family owned and operated business for over 100 years. The current Weiss family owned about 3% of the shares. There is no doubt their interest is aligned with share holders, a rarity these days. They retired over 26 million shares, or 40% of total shares, in the past 5 years. They smartly bought back over 7.9 million shares in 2009 under $10 a share, what a valuation creation for shareholders! They also patiently waited to acquire BlueMountain.com from At Home, a hot internet company, at a fraction of the price that At Home paid 2 years before! I don't know if the purchase is paying off or not, but it does show the discipline the management exhibited in making the acquisition because it was common for traditional companies to pay billions of dollars to buy a dot com start-up.
Key Challenges and Risks
- Accelerated deterioration in their businesses: There is always a chance that their traditional greeting card business experience a sharper (than historic) decline due to new technologies. However, I don't think this is likely. This is because their typical customer is a 47 year old female who has been their customer for years. In general, it takes time for people to change their habit. This is exactly the long term challenge the company is going to face: how can they target their business to a younger generation? I believe the more realistic threat is from the popularity of dollar stores where the cards are a lot cheaper.
- Concentrated Distribution: Wal-Mart and Target represent 14% and 13% of their fiscal 2010 sales. If any one of them decides to jump ship, it would have a sizable impact on the company.
- Bad Acquisitions: It is very common for companies to make bad acquisitions (just to buy revenue) in a mature or struggling industry because very few companies want to be liquidated even though it is very often the best option for shareholders. The company acquired quite a few web properties. It is not at all clear all the "new new" web properties will be good investments as a whole. This is one area investors should watch very carefully. A bad sizable acquisition would just defeat all the value arguments stated so far.
