Greeting card company American Greetings (NYSE:AM) announced second quarter earnings September 24, and they were nothing short of spectacular. By beating analyst estimates by 566%, 40 cents to 6 cents, it's managed to put a terrible fiscal 2009 in the rear view mirror and at the same time ratchet up the enthusiasm for 2010. The question remaining is whether its stock is worth owning. By the end of this article, we'll have a better idea.

IN PICTURES: Digging Out Of Debt In 8 Steps

A Five-Year Decline
In the past five years, American Greetings revenues dropped 12.7%, from $1.94 billion in 2005 to $1.69 billion in 2009, and net income dropped from a gain of $95.3 million to a loss of $227.8 million. These results aren't exactly highlights in its 103-year history. That's what makes this year's Q2 results that much more impressive. This time last year, American Greetings had a 4 cent earnings miss along with management's guidance of full-year continuing earnings from operations between $1.60-1.85 a share.

To come up with a blowout second quarter was pleasantly beyond expectations and should provide a boost to the stock in the coming months. That's a good thing, because its stock seriously underperformed over the last five years, compared to both the S&P 400 Mid Cap index as well as its corresponding peer group, which includes direct competitor CSS Industries (NYSE:CSS).

American Greetings & Peer Group\'s Stock Performance 2004-2009
Company Five Year Return
American Greetings (NYSE:AM) (11.9%)
CSS Industries (NYSE:CSS) (25.3%)
Blyth (NYSE:BTH) (64.1%)
Tupperware (NYSE:TUP) 181.1%
Lancaster Colony (Nasdaq:LANC) 43.6%
Data as of Sept 25, 2009

The Second Half Of The Year
Three events occurred at the end of fiscal 2009 and the beginning of fiscal 2010 that should make a difference in its business going forward. In February, it completed its acquisition of Chicago-based Recycled Paper Greetings. Buying the troubled company will add about $75 million in revenues. But more importantly, it gains an excellent creator of humorous greeting cards.

In addition, in April, it sold its retail stores to Schurman Fine Papers for $6 million while simultaneously buying Schurman's Papyrus brand for $18 million and a 15% equity interest in Schurman for an additional $2 million. For a net investment of $14 million, it got rid of a weight around its neck (retail stores), while acquiring another strong greeting card brand. Looking ahead, management expects the three moves along with other innovations developed internally will result in full-year free cash flow of $125 million, $55 million higher than earlier estimates. That's music to investor's ears.

Stock Valuation
Analyst estimates for 2010 are $2 per share. Based on 39.42 million shares outstanding, they're expecting net income of approximately $78.8 million. In 2008, its net income was $83.3 million, generating $243.5 million in total cash flow from operations and free cash flow of $187.8 million. Its 2008 free cash flow was 2.25-times its net income. If it does make $2 a share, as analysts estimate, return on equity would be 14.1% - 740 basis points better than its largest publicly traded competitor. It's definitely heading in the right direction. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

The Bottom Line
While its situation is much better than a year ago, its return on assets is mediocre. When Larry Tisch was alive, he used 12% as his minimum return on any assets he was considering buying. American Greetings has a long way to go before it achieves that type of return.

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