I am frequently surprised by the places where I find promising looking stocks, but really I shouldn’t be. Value can theoretically be found in any sector, although the newer and developing sectors are unlikely to hold much in the way of reliably underpriced stocks, since there is so much unpredictability in the future course of sector developments. Very often highly fragmented sectors resolve themselves into an oligopoly, with all the other firms either bankrupt or acquired by the winners, and without any indication of which companies will eventually land on top, it is often better to look for a more established industry. And what could be more established in American society than greeting cards?
Anyway, last Mother’s Day I recall being struck by the price of greeting cards these days. I didn’t look into it immediately, but I was flipping through the Value Line Investment Survey, as I sometimes do, and I ran across a promising company called American Greetings Corp (AM), which is the largest publicly traded greeting card company in the US. They also do a line of gift wrap and other products, and presently control the Strawberry Shortcake and Care Bears properties, although I should mention they were attempting to sell their interests in these properties before the economic collapse. These deals seem to have fallen apart, spawning a couple of lawsuits in their wake, one of which has been settled fairly recently.
In terms of numbers, it has a P/E ratio of about 10, and earnings have remained fairly robust over the last few years, although in 2009 they took a large goodwill writeoff. They also recently sold off their retail operations, while retaining the rights to supply these stores, which should lower their operating expenditures in future. The firm has recently engaged in several acquisitions, which seem to have gone well so far, but it does mean that their spending on new capital acquisitions has often exceeded their depreciation and amortization charges, although this trend was reversed last year.
One of their more impressive acquisitions, at least to me, was buying out Recycled Paper Greetings by purchasing their bonds at a large discount and then taking control of the company as a result of Chapter 11 proceedings, a bold move but one out of Moyer’s most excellent Distressed Debt Investing.
In the last three years, the firm has managed to buy back over $250 million in stock, which is nearly 1/3 of the current market cap. In terms of balance sheet, the firm has a price/book ratio of 1.35, but because they use LIFO inventory, which tends to understate inventory value, so the real situation might be a bit better. However, their balance sheet does indicate more than $400 million of “other,” and one hopes to see something a little less opaque.
I’m not sure that I see much growth potential in the company, barring an acquisition (although the company’s management seems to show the right degree of opportunism in acquisitions), but the firm’s income is stable, reliable, and above all, large enough to produce an adequate return on an investment, and as such it seems like a reliable long term holding. And I don’t see the greeting card becoming obsolete anytime soon.