American Greetings Case Study: Share Repurchase Program Analysis

This case study analyzes American Greetings' potential share repurchase program in light of declining revenue growth and share prices. The analysis considers the company's income statement, balance sheet, and business operating units to assess its financial health. Free cash flows and terminal cash flows are calculated using cost of equity and WACC, considering both bearish and bullish scenarios. The implied share price and valuation are determined using discounted cash flow techniques and valuation ratios of comparable firms. The analysis concludes that a share repurchase program is a favorable option for long-term shareholder value creation, supported by valuation metrics based on revenue and EBITDA multiples.

To: President, American Greetings
From: Management Accounting Team
Date: 24th March, 2019
Subject: American Greetings: Analysis on share repurchase program
Dear XYZ,
The company American Greetings is going through a structural shift phase and is suffering a decline
in the real revenue growth and operating profit. Even the share prices have declined significantly
over the past few years and is one of the lowest amongst the peers (Alexander, 2016). Due to this
the company is considering a share repurchase option to be funded from AG’s cash reserves and the
operating profit and for the same, a steady state economics based analysis has been done to work
out the implied share prices.
In case the income statement is analysed, we can see that the total revenue has decreased, but the
company has tried to control the costs like production cost, selling, distribution, marketing and
administration costs to improve on the operating income side. It is due to this that the company has
improved from losses in 2008 to profitability in 2010 and 2011 (Est.). In terms of the business
operating units, the growth of North American Social Expression Products continues to flourish and
being profitable at the same time (Goldmann, 2016). All these are positives for the company and the
only disadvantage (weakness) is the contraction of market due to introduction of social media and
electronic card based greetings which is creating a pressure on traditional business model but which
also serves as the opportunity for the company to grow and take a lead. The biggest threat is from
the competitor Hallmark which is already having worldwide revenue of $4 Bn. In terms of balance
sheet, the company’s debt has decreased and equity proportion (from 41.6% in 2009 to 49% in
2011) has increased which is again a positive indicator (Linden & Freeman, 2017).
For the purpose of calculating free cash flows and terminal cash flows, the cost of equity and WACC
has been computed for AG as well as other competitors using several variables. Post these, two
scenarios were built namely bearish and bullish and the WACC of AG itself was taken for
computation of cash flows as it is most reliable and equal to the average of WACCs of the
competitors as well. In case the trend in free cash flows is analysed, we can see that the forecasts
from 2012 to 2015 is on lower side as compared to actuals in 2011 (Arnott, Lizama, & Song, 2017).
Finally, the implied share price and valuation of entity has been done using discounted cash flow
technique and based on valuation ratios of comparable firms. In terms of DCF method, there is value
creation (EV= 1120 Mn) in bullish scenario and destruction of value (EV= 712 Mn) as per bearish
scenario. Furthermore the implied share prices stands at $23.10 and $12.46 respectively as
compared to the actual share price of $ 12.51 (Choy, 2018). When the valuation is done using the
industry average revenue multiple and EBITDA multiple, it can be seen that value is created in both
the cases and EV is $1457 and $1481 respectively implying that the company’s revenue and EBITDA
are healthy. The implied share prices are also $31.90 and $32.53 respectively in revenue and EBITDA
scenario which indicates that the future of the company is bright and it will grow (Jefferson, 2017).
In line of the above discussion and analysis, the company should go for share repurchase option as
compared to declaration of dividends as it will help the shareholders in value creation in the long
run.

Thank you.
References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4),
411-431.
Arnott, D., Lizama, F., & Song, Y. (2017). Patterns of business intelligence systems use in
organizations. Decision Support Systems, 97, 58-68.
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), 103-112.
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland .
Technological Forecasting and Social Change, 353-354.
Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making.
Business Ethics Quarterly, 27(3), 353-379. Retrieved from
https://doi.org/10.1017/beq.2017.1