American Greetings (NYSE:AM) sent a festive greeting card to the markets this morning. The cover said, "Having a great time, wish you were here." The inside, though, reveals a less cheerful outlook.
First-quarter revenues climbed by 2%, but the gain was entirely the result of an accounting change that caused five months of revenues from its Interactive segment to fall into the current quarter. Absent this change, revenues were flat with the previous year.
Reported earnings of $0.35 per share, compared with $0.06 in the previous year, are also not as robust as they seem: Last year's quarter included a $39 million charge on early debt retirement. And excluding unusual charges from both years, income from continuing operations was also essentially flat.
That's been pretty much the story for American Greetings the past few years. After undergoing a major restructuring in 2001, the company struck a high note in FY 2003 with earnings per share of $1.63, but it's been a downhill slide since. At least we can say that flat earnings to start this year is a step in the right direction.
American Greetings is in a tough market: It has to slug it out for shelf space with privately held Hallmark. Retailers typically go with one or the other and then play the two off against each other with gusto. Specialty providers CSS Industries (NYSE:CSS) and Taylor (also privately held) compete with certain special-occasion products, such as wedding invitations, gift wrap, and boxed greeting cards. While retailers like the margins from the greeting-card business, they don't like to manage all the SKUs, so they leave it to the greeting-card companies to keep the shelves stocked and seasonally correct, and that's a very labor-intensive process.
American Greetings is also grappling with a slowly declining retail operation, as well as with the trend toward free e-cards, which you can also find at Yahoo! (NASDAQ:YHOO), Disney (NYSE:DIS), and a host of other online sites. In short, I wouldn't describe printed greeting cards as a growth business.
But I wouldn't plan on sending the company any sympathy cards, either. This business is a cash cow, at least for the time being. Last year, American Greetings delivered free cash flow (cash flow from operations minus capital spending) of $311 million, or a festive $3.79 per diluted share, compared with the previous year's FCF that resulted in $3.13 per share. FCF per share is more than twice reported EPS. As you can imagine, the company is using that cash flow to pay down debt and repurchase shares. But the stock valuation, at 22 times trailing earnings, seems rich.
I can't find a suitable place for this stock in my portfolio. I tend to favor growth and a dominant competitive advantage. But investors who believe that cash is king might find American Greetings worth a glance.
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Fool contributor Timothy M. Otte is a last-minute greeting card shopper. He welcomes comments on his articles but doesn't own the stock of any company mentioned in this article.
