Wachovia analyst: Look for entry point in American Greetings

By Ronda Fears

Nashville, Tenn., May 13 - American Greetings has made a huge comeback from lows three months ago caused by Kmart Corp.'s bankruptcy, but Wachovia Securities convertible analyst Sri Nadesan said there's still some potential upside and investors should look for an entry point in the 7% due 2006.

"Basically, it's in a turnaround," Nadesan said.

"It's a hedge play. The cash flow is not too bad. For outrights, I wouldn't say buy it but if you own it, hold it. If the stock gets to $25 or $26, I'd say look to take some profits."

While Nadesan said he would not be a buyer with the stock at current levels, if it dips he said investors should look to buy. Conversely, he said, if the stock gets over $25, he would suggest taking some profits. He noted, too, that the bond is noncallable.

The convert is not a yield play, with the current yield at about 3.75% and conversion premium at about 16%. But, he said, it offers some decent cash flow and believes there's some upside potential left - perhaps 2 points in the stock, which would amount to 14 or 15 points in the bond.

On Monday, the American Greetings convert (Ba3/BB+) added 0.5 point to 187.375 bid, 189.375 offered as the stock gained 62c to $22.97.

"I have been bullish on the credit for some time now," Nadesan said.

"I view it as a BB type of credit that could get better in about a year. The company should have a chance to pay down some debt, because it should be cash flow positive this year."

On Friday, American Greetings issued its guidance for fiscal first quarter and fiscal 2003, putting earnings per shares for the quarter at 40c to 45c and at $1.45 to $1.50 for the year. The consensus for the quarter had been 32c. The quarter forecast compares to year ago EPS of 29c and the year's outlook compares to EPS of $1.09.

"I think that's low," for the fiscal 2003 projection, Nadesan said, which he expects could reach EPS of $1.75.

American Greetings CEO Morry Weiss said in a company statement that the company's improvement comes largely from its recent restructuring efforts. Amid that effort, the company hit a snag when Kmart, a major distributor for its cards and products, went bankrupt.

The American Greetings convert fell sharply along with the stock, and in early February was at about 117. The card company's credit ratings also came under hard scrutiny in January, but both S&P and Moody's affirmed the ratings.

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