This case examines the 2012 decision by American Greetings to repurchase shares. At the time of the decision, AG stock was trading at valuation multiples that were the lowest among its peer group; at the same time, the greeting card industry was facing an important structural shift. The company is arguably in a state of maturity or decline, so this must be taken into consideration.
The following areas should be addressed in this case:
1) The shares of American Greetings are currently at an EBITDA multiple that is at the bottom of its peer group. Do you think a 3.5 times multiple is appropriate for AG? If not, what multiple of EBITDA do you think is justified? What is the implied share price that corresponds to that multiple?
2) Using the data provided in case Exhibit 8, model the cash flows for AG for fiscal years 2012 through 2015. Based on the discounted cash flows associated with the forecast, what is the implied enterprise value of AG and the corresponding share price?
3) What are the key drives of your model?
4) What do you believe to be the value of AG shares? Do you recommend repurchasing shares?
Key data for DCF analysis
Implied Share Price = AG’s EBITDA x multiple – debt/shares outstanding
Planning Period Cash Flows – Case Exhibit 45.8 (Bullish Scenario): growth is expected to expand to 3% long-term operating margins are expected to maintain at 9%, working capital turnover is expected to improve, and fixed asset turnover is expected to remain steady. I have provided a “shell” spreadsheet outline for you to run your scenarios.
Discount Rate – Case Exhibits 45.6 & 45.9 Use the WACC for AG which is = 9.1%. This is also very close to comparable firms.
Terminbcqal Value – $1.1 billion
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