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Marilyn Barnett

Finc 4300W
November 20th, 2017
Professor Glambosky

American Greetings Case

1. What is going on at American Greetings? Founded in 1906 as a small Cleveland wholesale
shop, American Greetings Corporation, which advertises itself as the worlds largest publicly
owned creator, manufacturer, and distributor of social expression products, is second only to
Hallmark Cards, Inc., which is a privately held corporation, in the increasingly competitive and
tight-margin greeting card industry. The company's main U.S. greeting card brands are Carlton
Cards, American Greetings, and Gibson, the latter having been acquired in 2000; the sale of
everyday and seasonal greeting cards generates more than 55 percent of total revenues. Other
product lines include DesignWare party goods, GuildHouse candles, and Designers' Collection
stationery. Among the firm's domestic subsidiaries are Plus Mark, Inc. (gift wrap), Magnivision,
Inc. (reading glasses), Learning Horizons, Inc. (supplemental educational products), and A.G.
Industries, Inc. (display fixtures). Another subsidiary, Carlton Cards Retail, Inc., owns and
operates about 600 card and gifts shops in the United States and Canada. The majority-owned, Inc. subsidiary markets online greeting cards and related products
through several web sites and Internet services. American Greetings also creates, markets, and
licenses characters, including the Care Bears, Holly Hobbie, and Strawberry Shortcake. Non-U.S.
subsidiaries operate in Canada, Mexico, the United Kingdom, South Africa, Australia, New
Zealand, and Malaysia, and American Greetings distributes its products through a network of
more than 125,000 retail outlets in more than 70 countries. About 18 percent of sales originate
outside the United States.

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? Shares of American Greetings are currently trading at
an EBITDA multiple while the average for comparable firms is 7.5. EBITDA has shown little to no
growth in recent years. The company is undervalued because the prospects and plans of
American Greetings growth has been shifted into technology and that the EBITDA multiple
should be closer to 5x. The cause of the low multiple is the recent 50% decline in share price.
This decline in share price cut the companys market cap in half therefore hurting their
enterprise value and EBITDA multiple. Shares were trading at an average of $23 through 2010
and 2011. Given a share price of $23 holding all else constant their EBITDA multiple would be at
a more justifiable 5x. The importance in the decrease in market cap rather than the amount of
debt is clearer when you use market cap / EBITDA for comparable firms. Their market value /
EBITDA is 2.3 while comparable firms average at 6.7. It is highly unlikely or justifiable for
American Greetings EBITDA multiple to reach the average of 7.5. In order to do so, share prices
would have to increase 200% to $36. They could also issue $1 billion in debt or cut their EBITDA
by 60%, none of which would be good for the firm. American Greetings currently has $86
million in total cash. Spending this cash would directly increase the EBITDA multiple but not by
much. Spending this cash could possibly direct the multiple indirectly through market cap
appreciation if it is spent wisely. The firm should spend $75 million in share repurchases in
order to boost share prices and therefore returning the EBITDA multiple to a more justifiable

3. Please model cash flows for American Greetings for fiscal years 2012 through 2015. 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? Based on a discounted cash flow
model, what is your best estimate of the implied enterprise value of American Greetings and
the corresponding share price?

2011 2012 2013 2014 2015 Long-Term

Sales 1,677 1,694 1,719 1,754 1,798 1,851
Growth 1% 1.5% 2% 2.5% 3%
EBIT 152 155 158 162 167
Less: Income
Tax (40%) 61 62 63 65 67
Depreciation 0 0 0 0 0
Less: Change
in NWC -52 -18 -14 -11 7
Less: Change
in Fixed Assets 9 13 18 22 28
FCF 135 98 91 85 65
Value 1,223
Total FCF 135 98 91 1,309

Operating Margin 9%
Tax Rate 40%
Terminal Growth Rate 3%
Shares Outstanding 38.50
WACC 8.49%
Value of Firm $1,223.40
Value of Debt 235
Value of Equity $988.76
Stock Price $25.68
American Greetings sales would rise to a long-term high of 3% and the companys operating
margin would be steady at 9%. Using the companys WACC of 8.49% as their discount rate, the
NPV of the company is $1223(MM) with a stock price of $25.64

4. What are the key drivers of value in your model? Free cash flow forecasts, WACC, and the
terminal value because that is how you find out the debt and equity and share price. Do you
recommend repurchasing shares? Yes, if the company is optimistic about the future of the