financial analysis
American Greetings Case
1. What is going on at American Greetings?
a. Discuss the competitiveness of the industry.
b. Discuss the factors that drive the fundamental value of American Greetings.
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 yes, why? If not, why not? Whether you think it is appropriate or not what alternative multiple of EBITDA do you think could be used and why? What is the implied share price that corresponds to that multiple?
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? Discuss your results and the implications for the decision facing American Greetings.
4. What are the key drivers of value in your model and why? Do you recommend repurchasing shares? Provide specific reasons to support your recommendation.
3.
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Exhibit TN2 |
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AMERICAN GREETINGS |
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Valuation Model: Bullish Scenario |
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2011 |
2012 |
2013 |
2014 |
2015 |
SS |
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Revenue Growth |
5.3% |
1.0% |
1.5% |
2.0% |
2.5% |
3.0% |
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Operating Margin |
9.4% |
9.0% |
9.0% |
9.0% |
9.0% |
9.0% |
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NWC Turnover |
5.02 |
6.00 |
6.50 |
7.00 |
7.50 |
7.50 |
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FA Turnover |
1.95 |
1.95 |
1.95 |
1.95 |
1.95 |
1.95 |
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WACC |
8.5% |
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Tax Rate |
40% |
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Revenue |
1,677 |
1,694 |
1,719 |
1,754 |
1,798 |
1,851 |
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EBIT |
157 |
152 |
155 |
158 |
162 |
167 |
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NWC |
334 |
282 |
265 |
251 |
240 |
247 |
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Fixed Assets |
859 |
867 |
881 |
898 |
921 |
948 |
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ROC |
7.9% |
8.0% |
8.1% |
8.2% |
8.4% |
8.4% |
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NOPAT |
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91 |
93 |
95 |
97 |
100 |
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- incl. NWC |
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(52) |
(18) |
(14) |
(11) |
7 |
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- incl. NFA |
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9 |
13 |
18 |
22 |
28 |
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FCF |
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135 |
98 |
91 |
85 |
65 |
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TV |
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1,184 |
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DCF |
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124 |
83 |
71 |
916 |
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PV |
1,194 |
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Debt |
235 |
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Equity |
960 |
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Shares |
38.3 |
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Implied Price |
25.05 |
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Market Price |
12.51 |
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Exhibit TN4 |
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AMERICAN GREETINGS |
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Valuation Model: Bearish Scenario |
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2011 |
2012 |
2013 |
2014 |
2015 |
SS |
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Revenue Growth |
5.3% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
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Operating Margin |
9.4% |
8.0% |
7.0% |
6.0% |
5.0% |
5.0% |
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NWC Turnover |
5.02 |
6.00 |
6.50 |
7.00 |
7.50 |
7.50 |
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FA Turnover |
1.95 |
1.95 |
1.95 |
1.95 |
1.95 |
1.95 |
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WACC |
8.5% |
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Tax Rate |
40% |
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Revenue |
1,677 |
1,677 |
1,677 |
1,677 |
1,677 |
1,677 |
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EBIT |
157 |
134 |
117 |
101 |
84 |
84 |
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NWC |
334 |
280 |
258 |
240 |
224 |
224 |
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Fixed Assets |
859 |
859 |
859 |
859 |
859 |
859 |
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ROC |
7.9% |
7.1% |
6.3% |
5.5% |
4.6% |
4.6% |
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NOPAT |
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81 |
70 |
60 |
50 |
50 |
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- incl. NWC |
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(55) |
(22) |
(18) |
(16) |
- |
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- incl. NFA |
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- |
- |
- |
- |
- |
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FCF |
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135 |
92 |
79 |
66 |
50 |
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TV |
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592 |
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DCF |
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125 |
78 |
62 |
475 |
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PV |
739 |
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Debt |
235 |
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Equity |
504 |
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Shares |
38.3 |
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Implied Price |
13.16 |
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Market Price |
12.51 |
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Exhibit TN3 |
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AMERICAN GREETINGS |
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Estimate of Cost of Capital for American Greetings |
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Risk-Free Rate |
2.8% |
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Market Risk Premium |
5.0% |
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Tax Rate |
40% |
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D/V |
Bond Rating |
Cost of debt (Exh 8) |
Beta (Exh 6) |
Cost of equity |
WACC |
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American Greetings |
0.33 |
BB+ |
5.8% |
1.63 |
11.0% |
8.5% |
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Blyth |
0.18 |
B |
8.4% |
1.60 |
10.8% |
9.8% |
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Consolidated Graphics |
0.29 |
BB |
6.5% |
1.45 |
10.1% |
8.3% |
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CSS Industries |
0.00 |
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NA |
1.36 |
9.6% |
9.6% |
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Deluxe |
0.39 |
B |
8.4% |
1.85 |
12.1% |
9.3% |
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Lancaster Colony |
0.00 |
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NA |
0.42 |
4.9% |
4.9% |
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Meredith |
0.15 |
BB |
6.5% |
1.75 |
11.6% |
10.4% |
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Scholastic |
0.19 |
BB- |
6.5% |
1.04 |
8.0% |
7.2% |
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Average |
8.5% |
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Median |
9.3% |
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