American Greetings Harvard Case Solution & Analysis

American Greetings Case Study Solution

Evaluation under Bullish Trend:

In order to understand the company’s share price, the bullish trend is uses. Under the bullish trend, the revenue of the company is expected to increase by 3 percent, while the operating margins would increase by 9 percent. The tax rate has already given in case which is 39%. By subtracting the tax expense from operating margins, we get net operating profit after tax (NOPAT). By deducting change in working capital, the free cash flows of the company is find. The terminal value of the company is find by multiplying growth to the free cash flow of last year and by dividing the rate and growth. The enterprise value of the company by using the bullish trend is 2046 million. After deducting amount of debt which is 235 million the net value of the company is 1811. By dividing the outstanding number of shares which is 38.3 mention in the case the per share price of the company is 47.30

Evaluation under Bearish Trend:

Another evaluation method which is used in order to find out the per share price of the company to analyze the decision that either to repurchase the company’s share or not is the bearish trend. Under the bearish trend, the growth of revenue is considered to be zero which shows that the revenue of the company would be same for the next years. However, the operation margins of the company is growing at a rate of 6 percent. The tax rate is remain same as 39%. By deducting the tax rate from the operating margins the NOPAT of the company is get. It is assumed that when the sales of the company remain constant so there would be no additional need of working capital so the change in working capital would remain zero. The enterprise value of the company is 689 while after deducting debt which is 235, the value of the company is 454. Per share value of the company under bearish trend is calculated as 11.84. (Brigham)

Valuation Using EBITA Multiple:

If the company’s share would trade at the industry average EBITDA, then the enterprise value is 1304. By deducting debt from the enterprise value, the equity value of the company is 1069 and the share price of the company is 27.90.

Recommendation

After taking under consideration the entire analysis of worst and best scenarios that is discussed above; the findings under the each scenario is vary from each other. Each scenario influence the decision making. If the company is hopeful about their future growth and believe that in future its revenues and operating margins would improve then the company have to repurchase its shares because the stock price of the company would rise to 47.30. This shows that the current market value of 12.51 is highly under prices and the repurchase of share would be the best action to take.

If the company is expected that its revenue and operating margins would not be increased in future then the market value of its stock would have a chance to decrease to 11.84 from 12.51. This shows that under this condition the company’s market value of the shares is slightly undervalued.

However, It is recommended to the company to buy back its shares because there are higher chances of increase in company’s revenue because the company is considered to be second largest company in its industry and additionally, the company is using different tactics to attracts the customer which help the company to increase its sales such as customize cards and selling cards through websites and generating electronic cards. In addition to this, if the company is buyback its shares from the market it would improves the EPS of the company which ultimately increases the value per share. Furthermore, the company should have to improves its technology because the industry is moving towards the technological advancement.

Conclusion

On the basis of above analysis it is concluded that American greeting is considered to be one of the dominating player in its market. However, the company is facing a decline in its share prices in comparison to its peer. It is recommended to the company that buying back of its share from the market is seems to be feasible decision which help the company to improve its share price of the company and maintain its competitive position.

Appendices

Appendix-1: Calculation of WACC

Appendix-2: Bullish Trend

Appendix-3: Bearish Trend

Appendix-4: Valuation Using EBITA multiple

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