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My first attempt at Fundamental Analysis: American Greetings

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January 06, 2011 – Comments (14) | RELATED TICKERS: AM.DL2

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I am a trader, but I am trying to start to learn about investing.  This is the first fundamental analysis I have ever done (I have done fundamental analysis before, but only very simply stuff that took 10 minutes).  It only took me about 3 hours so I am skeptical as to how good it is

 So, please, criticize the hell out of this- I am trying to learn.  Tell me what doesn’t matter at all in my analysis (even if it matters a little bit, then I find it important, so only tell me if it matters 0%) .  Also, tell me what I have left out

Special shout out to Griffin416, as he helped me find the stock and gave me about 20% of the things I listed below.

 

This stock is listed as “business services”, but I am considering it retail- Tell me if this is incorrect.

1)    Very low P/E.  I consider this to be a very important figure in evaluating retail. At a current P/E just over 10, and a forward P/E just over 8, this is not only a lot better than industry average of 20.20, but better than the S&P as well

2)   PEG under 1 (0.92 to be specific)

3)   I read an article in forbes that 90% of americans send cards.  Despite the book store chains dying, I think greeting cards has a while to go, especially considering they sell e-cards (there are free ones, but hey, if they make a profit from this than who am I to judge?)

4)   A recovering economy improves discretionary spending; i.e., this

5)   50% cash buyback in the past 5 years, that is insane

6)   The chart appears to be breaking out to the upside

7)   20% short interest could mean a squeeze is coming

8)   Only 1 analyst covers it, so it could be unfollowed enough to be undervalued.

9)   Highest Gross Margin of its peers by far (58% versus industry average of 38%)

10)                   Highest Market Cap of its peers, which usually I don’t like, but in an industry like this where I think most people don’t even notice the brand name (other than hallmark, but that is privately held) I think big size is good to whether storms…plus brick and mortar growth is hard at this point anyway.  Its still not even a 1 billion dollar company, so its not too big to grow.

11)                   Its 50% off of its all time highs (this doesn’t mean much, but its worth something)

12)                   A 2.40% dividend isn’t too shabby

13)                   It sells amazon gift cards, and I am bullish on amazon

14)                   Its expenses are going down year over year

15)                   Inventory is increasing a little, but in a period where I expect inflation, this should be a good thing (right?)

16)                   Great cash flow

17)                   This is something I need help with- Assetts and liabilities.  Real liabilities is all listed liabilities on the balance sheet, but you subtract stockholders equity and surplus, because that is only there to make the balance sheet balance, right?  If that is the case it has almost twice as many assets as liabilities (not much goodwill either)

18)                   It appeals to aging baby boomers who were brought up thinking sending cards is proper, so as they get older and become grandparents they will send out more cards.  Plus, they have the most money

19)                   The consumer confidence index is at decade highs

20)                   It beat earnings 5 of the last 7 times

21)                   I have calculated an inventory turnover of 0.25.  I am almost positive this is incorrect.  If somebody can check their finances and double check that for me, that would be good.  I got COGS/average inventory, which was inventories listed under expenses on the cash flow divided by (last years ending inventory plus this years inventory divided by two)…is this the right way to do it? Also, how do I find this for competitors?  Do I have to read the 10k for every one of its peers?

22)                   It operates in North America, Canada, Australia, New Zealand, and Mexico…international exposure and no euro nonsense

23)                   They own care bears and strawberry shortcake…these were big hits at one time, so they know how to create good stuff.

24)                   It + hallmark = 85% market share…they have a good niche

25)                   Up even when it got downgraded

26)                   Women are the main purchasers of AM, and (no offense) but women spend all of the time, even in reccessions

27)                   They acquired two businesses (in the same field thank god) in 09; this shows me financial strength, especially since 2009 was uncertain to many

 

 

They cant grow TOO much more, but they are at least undervalued in the short term.

It has a current ratio of 1.90, and no short term debt.  Its long term debt is between 6-7.75%.  I don’t know how to analyze this in regards to AM, can you help me with this? My main concern is the slight revenue loss

Also, the things where I compared it to the “industry”…I am not even sure what companies it compared to, I am not really sure who the competitors are, so this stuff may be skewed- how do I find the direct competitors better than the competition button on google finance or yahoo finance

My main concern is the slight revenue loss.

 

What do you Fools think?  Any and every bit of advice is incredibly appreciated.

 

14 Comments – Post Your Own

#1) On January 06, 2011 at 10:07 AM, Momentum21 (95.67) wrote:

Good work...

I would like to see more of the "risks"

At a glance their revenues on the core businesses are declining. My gut tells me that is going to continue to be a headwind for them if they are not expanding the business into other areas. It also appears that those 2 acquisitions could be an issue going forward. The party goods business needs to be considered separately. I didn't dig deeper into the potential of those acquisitions but I am not sure value was added.

Are they doubling down on their challenges or will they be able to add value and leverage the brand to bring that growth back?

If it is them and Hallmark with 85%+ share how can you declare a P/E of 10 cheap? I don't see the growth to pay for this... : )

I am just playing devil's advocate...I do like your analysis. thanks for sharing 

   

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#2) On January 06, 2011 at 10:28 AM, rebello15 (< 20) wrote:

for 17, the basic equation is

Assets = Liabilities + Stockholder Equity

100=45+55 is an example

is that what your asking?

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#3) On January 06, 2011 at 10:35 AM, Valyooo (99.33) wrote:

@rebello

Yeah, thanks for clarifying

@ Momentum, you may be right...but with the PEG under 1, isn't there growth?

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#4) On January 06, 2011 at 10:36 AM, Valyooo (99.33) wrote:

At a forward P/E of 8, even with no growth (under the economy) isn't a P/E of 8 still good?  thats over 12% a year return, which isn't shabby

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#5) On January 06, 2011 at 10:56 AM, Momentum21 (95.67) wrote:

#4 - I was just picking at your comparison to the "industry" which much broader (I assume you are looking at publishing). And yes the number itself is good but the business appears to be highly cyclical. 

2010 was an impressive year for earnings for AM.

Overall part of your analysis should have the potential pitfalls. The bull case can be boiled down to "print is not dead" (same reason I own NYT) but is this a similar model to solid print news companies?  The digital piece seems very small in comparison to the legacy business and will they be able to play in that arena with as strong a market position?

I want to know more about these other businesses they bought.  

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#6) On January 06, 2011 at 11:03 AM, 1277507302 wrote:

Are you certain you don't mean technical analysis? 

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#7) On January 06, 2011 at 11:16 AM, truthisntstupid (80.97) wrote:

That's a pretty good first analysis, valyooo.

As to your comment #4, when you invert the P/E, that's called earnings yield.

With a PEG under 1, there had to be growth.

Other things you could look at are debt (interest) coverage; ie, how easily does the company cover its debt?  This is usually expressed as a multiple.  You can find it here in CAPS on the "ratios"  page.

I like to look at dividend payout ratio, dividend growth rate, I may look at 5-year average dividend payout ratio and 5-year average dividend yield, and 5-year average P/E, 5-year high P/E and 5-year low P/E.

 Looking at current P/E and forward P/E as you have done is important, too.

If they've recently made two acquisitions and still don't have a lot of goodwill on their balance sheet I would think that sounds like they did pretty good.

 As you learn more you will always be adding to things you like to look at, and you may consider some things more important to you than others do, and vice versa.

I like to look at return on equity, then break it down:

ROE = Return On Aseets X Equity Multiplier (Financial Leverage Factor, this is Assets/Equity).

Return On Assets further breaks down to

Asset Turnover X Net Margin.

Finally, Asset turnover is a measure of how efficiently a business utilizes it assets, or, how many dollars in revenue does it generate for each dollar of assets?

Asset Turnover, then, is simply Revenue/Total Assets.

The complete Return On Equity:

Asset Turnover X Net Margin X Equity Multiplier.

You can get all of these going back ten full years at Morningstar.com.  They're great for doing an in-depth analysis of exactly what's going on with a company's return on equity and what long-term trends are. 

If ROE is increasing even though a company has been recently deleveraging, for example,  that's a really great thing to have dug up.  Break ROE down and see why.  Is it because of improving margins?  Increasing revenue?  Does it look like it could continue?  What do analysts think?  What do YOU think?

These are some of the things I look at.  I hope this helps.

 

 

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#8) On January 06, 2011 at 11:18 AM, truthisntstupid (80.97) wrote:

Return On Equity = Return on Aseets X Equity Multiplier

 

Return On Equity = Return On ASSets X Equity Multiplier

 

I hate it when I miss something stupid in my proofreading.

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#9) On January 06, 2011 at 11:32 AM, JaysRage (88.94) wrote:

If you are really doing a fundamental analysis, then you need to focus on fundamentals.   As a trader, it might be very difficult to ignore the charts, but fundamental analysis is about valuation, not about price fluxuations.  

1) Be careful about industry comparisons when they have no real peers.   Who are you comparing them to?   Besides Hallmark, who is private, there is no direct peer.   I usually try and find two very comparable companies to compare P/E ratios.   This is difficult to do here, so you will either have to take a very small company and project, or you will have to take a company that doesn't deal 100% in this space.  Difficult in either case.   It adds risk to your analysis.    

2)  Calculate your own PEG and use conservative forward growth projections.  In the case of AM, they look like they might be flat year over year, so I think the PEG of .9 is possibly inflated.

3)  Calculate the total market for greeting cards.  Split it into physical cards and e-cards.   Calculate the current American Greeting market share of its total market.   Determine if AG can grow just because their market is growing or if they will have to grow market share, which could cost marketing/advertising money.   In a shrinking market, just holding onto current customers might take additional marketing spend.   Is AG the leader or the follower?  Are there other emerging competitors? 

4) Are greeting cards discretionary spending?   Do greeting card sales increase in weak economies (substitute for gifts) or expand?

6-7-8-11) Not relevent in fundamental analysis. 

22)  Are these potential sources of revenue growth? 

23) Particularly relevent as the kids that owned these become parents.  Potential revenue growth.

I wouldn't touch this with a 10 foot pole, because I know so very little about this market, that I can't determine growing/shrinking, competitive forces, deal-breaking risks, true dollar impacts of macro events like aging and ownership of Care Bear and Strawberry Shortcake rights.  

My gut tells me P/E 12.5 is fair valuation.....which includes a P/E of 10 and includes the roughly 2.5 for the divvy, but I'm not confident in it.  

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#10) On January 06, 2011 at 11:38 AM, JaysRage (88.94) wrote:

By the way, I agree.....that for your first fundamental analysis, you hit a lot of the key points and did a pretty good job.   You also picked a particularly difficult company to analyze.   Personally, I wouldn't feel that I could properly analyze the market, so I would move on. 

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#11) On January 06, 2011 at 12:01 PM, Valyooo (99.33) wrote:

Thank you all for the compliments, but especially for the help.

Jay, you are right...I am going to hold onto this as a trade then.  Gonna hold out for a squeee (I almost never recommend this, but with the buybacks and dividend and chart breakout I am confident it will come)

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#12) On January 06, 2011 at 12:01 PM, Valyooo (99.33) wrote:

Thank you all for the compliments, but especially for the help.

Jay, you are right...I am going to hold onto this as a trade then.  Gonna hold out for a squeee (I almost never recommend this, but with the buybacks and dividend and chart breakout I am confident it will come)

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#13) On January 11, 2011 at 4:47 PM, TMFBabo (100.00) wrote:

The general format I'd follow is:

1. What the company does and how it makes money.  This doesn't have to be completely dry - you can add backstory and such. 

2. How the company expects to make more money in the future.  What moves do they plan on making?  

3. Why you think it's a buy (or short): what's the opportunity - this is probably the valuation section

4. Upside (catalysts) and downside (risks)

5. Conclusion, last thoughts, what you think we should do, etc.

Don't take my style as gospel - this is just a general format from which I deviate often.  I do recommend adding more structure, though. 

I highly recommend paragraph form - it makes it more pleasing to the eye (easier for your readers) and also forces you to structure your piece logically.   

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#14) On January 11, 2011 at 8:22 PM, Valyooo (99.33) wrote:

Very good points.  I did this at like 3 am, and was putting it in number form because i wanted to see how many angles I had covered, and mostly because I wanted people to reply like this:

1) I agree

2) I wouldn't look at it the same way

3) This ratio is unimportant

Etc.

However, you are right I think people would be more inclined to read it your way.

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