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American Greetings Case1. What is going on at American Greetin.docx
- 1. American Greetings Case 1. What is going on at American Greetings? a. Discuss the competitiveness of the industry. b. Discuss the factors that drive the fundamental value of American Greetings. 2. 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 share price that corresponds to that multiple? 3. 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? Please explain your results and the implication for American Greetings. Based on a discounted cash flow model, what is your best estimate of the implied enterprise value of American Greetings and the corresponding implied share price? Explain your results and the implication for American Greetings. Use the following table to model the free cash flows for American Greetings for fiscal years 2012 through 2015. Forecast the Steady State cash flows in order to determine the Terminal Value. I have provided guidance for identifying the 2011 actual values and the forecasted values. 2011A 2012 2013 2014 2015 SS
- 2. Revenue Growth 5.3% 1.0% 1.5% 2.0% 2.5% 3.0% Operating Margin 9.4% 9.0% 9.0% 9.0% 9.0% 9.0% NWC Turnover 5.02 6.00 6.50 7.00 7.50 7.50 FA Turnover 1.95 1.95 1.95 1.95 1.95 1.95 WACC 9.1%
- 4. NWC Exhibit 3 =Revenue/NWC TO Fixed Assets Exhibit 3 =Revenue/FA TO ROC =EBIT*(1-T)/(NWC+FA)
- 5. NOPAT - Change in NWC - Change in NFA FCF TV
- 7. Shares Exhibit 6 Implied Price 4. What are the key drivers of value in your model? Do you recommend repurchasing shares? 1
- 8. Title PageThis spreadsheet supports STUDENT analysis of the case “American Greetings” (UVA-F-1693).This spreadsheet was prepared by Michael J. Schill, Associate Professor of Business Administration. Copyright © 2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail [email protected] No part of this publication may be reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. Feb. 11, 2016 Exh 1Exhibit 1AMERICAN GREETINGSAmerican Greetings Share Price (Monthly Close)Closing Adjusted Price for American Greetings SharesDec-09$21Jan-10$17Feb-10$18Mar- 10$20Apr-10$23May-10$22Jun-10$18Jul-10$20Aug-10$18Sep- 10$18Oct-10$19Nov-10$19Dec-10$22Jan-11$21Feb-11$21Mar- 11$23Apr-11$24May-11$23Jun-11$23Jul-11$22Aug-11$21Sep- 11$18Oct-11$16Nov-11$17Dec-11$13 Closing Adjusted Price for American Greetings Shares 40148 40182 40210 40238 40269 40301 40330 40360 40392 40422 40452 40483 40513 40546 40575 40603 40634 40665 40695 40725 40756 40787 40819 40848 40878 20.57 17.45 18 19.8 23.33 22.4 17.95 19.600000000000001 18.46 17.920000000000002 18.670000000000002 19.34 21.5 21.08 21 22.89 24.01 23.43 23.46 21.78 20.85 18.170000000000002 15.87 16.84 12.51 Exh 2Exhibit 2AMERICAN GREETINGSAmerican Greetings Income Statement, December 2011 (in millions of dollars)2008200920102011E(Feb 2009)(Feb 2010)(Feb 2011)(Feb 2012)Total American Greetings FiguresTotal Revenue1,6911,6361,5931,677Material, Labor, and Other Pruduction Costs810713682743Selling, Distribution, and
- 9. Marketing Expenses619508478526Administrative and General Expenses226276261258Goodwill and Other Intangible Asset Impairments290000Other Operating Expenses103(6) Operating Income(253)139175157Net Interest and Other Nonoperating Expenses22181928 Income Before Income Tax Expense(275)121156129Income Tax Expense(47)396947 Net Income(228)828782Earnings Per Share (Basic)(4.89)2.072.182.22Dividends per Share0.600.360.560.60By Business UnitOperating Segment Net SalesNorth American Social Expression Products1,0951,2351,1911,215International Social Expression Products271254262344Retail Operations17912AG Interactive83807868Operating Segment EarningsNorth American Social Expression Products70236218148International Social Expression Products(78)172020Retail Operations(19)(35)AG Interactive(162)111414Total Revenue by Product CategoryEveryday Greeting Cards704764753823Seasonal Greeting Cards357369377408Gift Packaging240221223239Other Revenue44383232All Other Products345244207176Note: Fiscal year ends February of subsequent year.Source: Company accounts; management and case writer estimates. Exh 3Exhibit 3AMERICAN GREETINGSAmerican Greetings Balance Sheet (in millions of dollars)200920102011E(Feb 2010)(Feb 2011)(Feb 2012)Cash and Cash Equivalents138216172Trade Accounts Receivable136120130Inventories164180190Prepaid Expenses148128131Other Current Assets947254 Total Current Assets679716677Net Property, Plant, and Equipment and Other Assets850832859 Total Assets1,5291,5471,536Debt Due within One Year100Accounts Payable958787Other Current Liabilities272245255 Current Liabilities369332343Long-Term Debt329233235Other Liabilities196219206Shareholders’ Equity636763752 Total Liabilities and Shareholders’ Equity1,5291,5471,536Note: Fiscal year ends February of subsequent year.Data source: Company accounts, management
- 10. and case writer estimates. Exh 4Exhibit 4AMERICAN GREETINGSTotal U.S. Greeting Cards Sales (Actual and Forecast)Sales at current pricesin millions of dollars% annual change20056,53720066,420- 1.820076,285-2.120086,266-0.320096,149-1.920105,935- 3.52011 (est.)5,838-1.62012 (est.)5,711-2.22013 (est.)5,596- 2.02014 (est.)5,478-2.12015 (est.)5,359-2.2Data source: Mintel, based on U.S. Census Bureau, Economic Census. Exh 5Exhibit 5AMERICAN GREETINGSFeelings About E- cards: Usage Change Among 2,000 Respondents, October 2010By Age CategoryAll18-2425-3435-4445-5455-6465+In the last year, I have sent more e-cards than I used to.22%17%26%20%22%21%24%In the last year, I have sent fewer e-cards than I used to because I send greetings over social networking sites such as Facebook.20%26%27%21%19%15%13%Source: Mintel. Exh 6Exhibit 6AMERICAN GREETINGSComparable Firms, End of 2011 (in millions of dollars except share price)Share PriceShares OutstandingTotal CashTotal DebtEnterprise ValueRevenueEBITDAEBITDA Multiple*American Greetings12.5138.3862357141,6602043.5Blyth56.808.21821015 689844811.7Consolidated Graphics48.2810.271976921,0501225.6CSS Industries19.929.7100194453306.5Deluxe 22.7650.9317421,9011,4203595.3HallmarkNANANANANA4,10 0NANALancaster Colony69.3427.316201,8901,09015612.2Meredith32.6544.8262 501,7121,3502407.1Scholastic 29.9731.11142151,1451,9501896.0ROAROEBetaBond Rating**American Greetings7%11%1.63BB+Blyth4%9%1.60BConsolidated Graphics5%10%1.45BBCSS Industries4%2%1.36Deluxe 13%55%1.85BHallmarkNANANALancaster Colony14%19%0.42Meredith7%15%1.75BBScholastic 6%8%1.04BB-* EBITDA multiple is defined as Enterprise Value divided by EBITDA.** The ratings for Cons. Graphics
- 11. and Meredith are estimated by case writer.Data source: Yahoo! Finance, Standard & Poors, and Mergeant. Exh 6 (Continued)Exhibit 6 (Continued)AMERICAN GREETINGSComparable FirmsBlythGlobal marketer of candles, gourmet foods, weight management products, holiday cards, photo albums, and houseware productsConsolidated GraphicsProvides commercial printing services in North America, including brochures, shareholder communications, trading cards, calendars, catalogs, and greeting cardsCSS IndustriesDesigns, produces, and sells social expression products in North America, including greeting cards, gift wrapping, Valentines cards, Halloween costumes, and stationeryDeluxe Provides printed products to financial institutions and small businesses worldwide, including forms, checks, envelopes, and greeting cardsLancaster ColonyManufactures and markets specialty foods, glassware, and candles in the United StatesMeredithLicenses brands and publishes magazines (e.g., Better Homes and Gardens, Ladies’ Home Journal, FamilyFun) in the United StatesScholastic Publishes and distributes children’s books and other media in the United StatesData source: Case writer descriptions. Exh 7Exhibit 7AMERICAN GREETINGSAmerican Greetings Operating Performance2005200620072008200920102011Revenue Growth0%-7%-1%-5%-3%-2%7%Operating Margin8%2%5%- 1%6%9%9%Note: Fiscal year ends February of subsequent year.Data source: Company financial statements. Revenue Growth 2005 2006 2007 2008 2009 2010 2011 2.0799999999999998E-3 -6.9589999999999999E-2- 7.9100000000000004E-3 -4.87E-2 -2.92E-2 - 2.3800000000000002E-2 7.492E-2 Operating Margin 2005 2006 2007 2008 2009 2010 2011 8.1879999999999994E-2 2.2239999999999999E-2 4.727E-2 -5.3E-3 6.3299999999999995E-2 8.9149999999999993E-2 8.9899999999999994E-2
- 12. Exh 8Exhibit 8AMERICAN GREETINGSFinancial Forecast AssumptionsActual *********** Forecast ***********20112012201320142015Bullish ScenarioRevenue Growth5.3%1.0%1.5%2.0%2.5%Operating Margin9.4%9.0%9.0%9.0%9.0%Net Working Capital Turnover5.026.006.507.007.50Fixed Asset Turnover1.951.951.951.951.95Bearish ScenarioRevenue Growth5.3%0.0%0.0%0.0%0.0%Operating Margin9.4%8.0%7.0%6.0%5.0%Net Working Capital Turnover5.026.006.507.007.50Fixed Asset Turnover1.951.951.951.951.95Note: The ratios are defined in the following manner: Revenue Growth is the annual percentage change in total revenue. Operating Margin is operating income divided by total revenue. Net Working Capital Turnover is total revenue divided by net working capital where net working capital is current assets less current liabilities. Fixed Asset Turnover is total revenue divided by net PP&E and other assets.Data source: Case writer estimates. Exh 9Exhibit 9AMERICAN GREETINGSCapital Market DataYield30-Day Treasury Bill0.1%10-Year Treasury Bond2.8%10-Year Corporate Bonds of Industrial CompaniesAAA2.8%AA2.9%A+3.2%A3.3%A- 3.5%BBB+3.8%BBB4.1%BBB-4.6%BB+5.8%BB6.5%BB- 6.5%B+6.8%B8.4%B-9.0%Historical Market Risk Premium Equity Market Index Less Government Debt5.5%5-Year ForecastU.S. Real GDP Annual Growth Rate3.3%U.S. GDP Annual Deflator Rate1.8%Consumer Price Index Annual Rate2.2%Data source: Bloomberg, Value Line Investment Survey, and case writer estimates.