Financial publication Barron's recently highlighted some of star money manager Mark Travis' stock picks, and at the top of the list was American Greetings (NYSE:AM). Travis bought in at $19.34, and even though it's trading around $22, he believes it can go higher, possibly to the high $20s, which is completely possible. However, for those who haven't bought already, let me offer a piece of advice. If you want to make money with this stock long-term, you need to time your purchases. Here's why.
TUTORIAL: Basic Financial Concepts
In the past decade, American Greetings has traded below $20 for an extended period just twice: The first between June 2001 and September 2003 (28 months), and the second between January 2008 and September 2009 (21 months). Over 120 months, its stock has traded above $20 approximately 59% of the time. Long-term, it's impossible to know how high or low it will go, but history seems to indicate that time is on your side. There are several fundamental reasons why you might own this stock but for me, the most compelling has more to do with technical analysis and trending than it does earnings per share or anything else along those lines.
But before going deeper with examination of the stock's historical trends, let's consider the positive and negative aspects of American Greetings, the company. In fiscal 2011, although revenues dropped 2.6% to $1.6 billion, there was some good news to report. Operating profits increased 25.6% to $174.7 million, resulting in a 250 basis point improvement in operating margins. Unfortunately, because of higher federal taxes and income tax settlements from previous years, its net income improved by just 6.7% to $87 million.
On the bright side, free cash flow in 2011 was $143 million, the second consecutive year above $100 million. Management guidance suggests it could three-peat in 2012. Investors like Mark Travis love double-digit free cash flow yields. American Greetings' FCF yield currently sits at 15%. Even if 2012 free cash flow drops to $80 million, which is the bottom range of guidance, and everything else stays the same (market cap, debt and cash), the yield would still be a very respectable 8.4%. On the operations side, it successfully integrated Recycled Paper Greetings and Papyrus into the fold in 2011. These brands, as well as Carlton Cards and Gibson, will help to deliver 5% revenue growth in the coming year, which translates into $2.45 earnings per share. At current prices, that's a P/E of 9.4, which is reasonably cheap compared to its peers.
American Greetings and Peer Group
|Company||Trailing P/E||Forward P/E|
|American Greetings (NYSE:AM)||11.0||8.0|
|Lancaster Colony (Nasdaq:LANC)||16.5||14.9|
|CSS Industries (NYSE:CSS)||31.5||16.6|
Ride the Trend
Morningstar's chart for American Greetings goes as far back as June 1972. In 39 years, its stock has a total return of 117%; that's 10% the returns of the S&P 500. That's dreadful. However, this presents opportunity. In 2009 and 2010, American Greetings repurchased 9.4 million of its Class A shares at an average cost of $8.47. At today's prices, that's a return of 173% on its investment. So the first lesson here is that you want to be buying whenever the company repurchases 500,000 shares or more in a quarter. It appears the company will understand the intrinsic value of the stock better than most. Secondly, every time its stock trades under $20 for 3-6 months non-stop, you might want to be buying because history tends to repeat itself.
The Bottom Line
The only visible beef with American Greetings is that it doesn't get enough out of its assets. Considering it trades for just 1.3-times tangible book value, that's not worth quibbling about. There are some who believe the greeting card is going the way of the horse and buggy. Just as going to the movies and renting DVDs co-exist, so too can paper cards and e-greetings - and American Greetings does both. (Find out how the PPI can be used to gauge the overall health of the economy. Check out Predict Inflation With The Producer Price Index.)