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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!