A Bit of Cheer from American Greetings

The message from American Greetings (AM ), the world's largest public greeting-card outfit, is grim: Earnings are down, and the stock dropped from 14 in March to 10 in June, before edging up to 11. But Charles Lemonides of M&R Capital Management, has been buying. "We love unloved companies with solid franchises, whose stocks have been disdained and thrashed," he says. Lemonides' M&R portfolio scored a 4.8% gain in the first half of 2001, vs. a 7.2% loss in the S&P 500.

American Greetings, with operations in 75 countries, is out of favor, he says, because management lost focus, causing earnings to drop and debt to pile up. But new leadership is cutting costs, paying off debt, and taking steps to boost margins. On its sales of $2.5 billion a year, improved margins could boost earnings by 50% over the next 12 months, estimates Lemonides.

The stock could double in a year as signs of an earnings turnaround should show up in six months, he says. The company, which posted a loss of $1.79 a share in the year ended Feb. 28, 2001, should earn $1.10 in 2002 and $1.30 to $1.50 in 2003, estimates Lemonides.

Some analysts worry that American Greetings may be dropped from the S&P 500, since its market cap of $715 million has made it the second-smallest company in the index. Removal could bring the stock down some more. But to Lemonides, that should be another buying opportunity. American Greetings' business franchise "is solid and defensible," he argues--and "a turnaround is in sight."

By Gene G. Marcial

    Before it's here, it's on the Bloomberg Terminal.