American Greetings makes greeting cards. Conventional wisdom says this is a dying business – the world now revolves around email and Facebook, not old fashioned greeting cards. Revenues mirror this wisdom to an extant – ten years ago the company brought in just shy of $2B which slowly declined until 2010 they brought in ~$1.6B before rebounding to $1.7B in FY11.
While the stock has remained range bound throughout the last several years, large amounts of free cash flow allowed management to quietly buy back 44% of the shares allowing earnings to grow from $1.54/share to 2.64/share over the last 10 years.
These buybacks are evidence of a management team that puts share holder interests first… and they should, because the CEO and COO are brothers Jeffrey and Zev Weiss whose family founded the company and first took it public in 1958. Together with assorted family trusts they control 51% of the voting rights of the company.
Despite being a cash cow the share price has lagged due to the above mentioned “conventional wisdom” and the fact that in recent quarters capital spending has come under question. The most egregious example of this questionable spending is management’s plan to spend up to $200M building a world headquarters building.
The thought of future cash flows being spent on projects with questionable return had the shares trading below $15 before management announced plans to take the company private for $17.18 a share on 9/25.
Wednesday morning a law suit was filed by a share holder to halt the take private proposal because it is greatly under values the company.
With average free cash flow over the past 4 years of ~$3 / share, I would tend to agree.
This is a company in decline, but it is not terminal. Despite the advent of email etc, people will always appreciate the more human touch of an actual hand written card. I think it is fair that a company like this is worth at least 7 or 8x free cash flow, which puts us in the $21-24 range, significantly above management’s $17.18 bid.
At this point the situation begins to look like a reasonable risk reward trade. Considering the psychology of the buyer – 2 guys who want to restore the legacy of their 100 year old family business by taking it private – 2 guys who want to empire / ego build $200M headquarter buildings for a greeting card company without being yelled at by pesky outside shareholders – I think it is reasonable to assume that the downside on an investment at this point is break even. It is of course entirely possible that they just decide to walk away from their bid, but it seems unlikely.
On the upside, I don’t think there is huge potential – like I said above, maybe the company is worth $21-24 / a share, but its difficult for me to imagine that management will boost their bid by 40%. I don’t think they would be bidding at all unless they thought they were getting a deal.
They control 51% of the voting power so they can pretty much tune out the complaints of outside shareholders if they want to – they don’t NEED to take it private to build their fancy headquarters building. That being said, I could see them boosting their bid by a dollar or 2 to the $19 level to bring the company back within the family fold. From today’s prices that would be a bit over an 11% return net of expenses. Not a huge return, but a relatively safe return.
Of course one could also think about juicing those returns by buying calls rather than equity, but again, who knows if they will actually raise their bid? By getting involved with options you risk total capital loss. If they don’t boost their bid or if they pull their bid. If you stick with the equity and they pull their bid you risk owning a company with a strong record of FCF generation and a management team that has a strong history of returning capital to shareholders that has apparently temporarily lost their way.