This manufacturer of film and TV-themed stationery and ‘greetings products’ may sell an eclectic range of merchandise, but it has been able to manage substantial economies of scale which look set to bolster the business during tough times.
Tip of the week: International Greetings (IGR), rated a BUY by The Times
International Greetings is the largest manufacturer of ‘greetings products’ and film/TV-themed stationery in Europe, and the third-biggest in the world behind Hallmark and American Greetings. The firm employs more than 2,000 staff and makes gift-wrap (33% of its £197m sales); accessories (19%); Christmas crackers (11%); greetings cards (8%); stationery (10%) and other products, such as children’s books and fridge magnets (19%).
This may seem an eclectic mix, but there are numerous synergies across the range – such as distribution, manufacturing and design – resulting in substantial economies of scale for International Greetings, which makes it more competitive. The group was founded in 1979 and has operations in the UK (60% of sales), continental Europe (15%), the US (23%) and Australasia (2%). But margin pressure is fierce across the industry, so International Greetings has been expanding production in low-cost regions, such as China and eastern Europe.
The group places great emphasis on its product design and employs around 120 people in its creative operations. It holds lucrative licences to sell merchandise for many well-known family characters, including Shrek and The Simpsons, and is also a client of Disney, who recently named International Greetings its European Licensee of the Year. In order to diversify away from low-margin, own-label goods in the UK, which account for 33% of revenues, it has been acting as an industry consolidator and snapping up rivals across the world. In August, it bought Halloween Express in the US and has followed this up with two other deals with Australia’s Artwrap and another US group, Glitterwrap. As many of these smaller players are having difficulties due to lack of scale, International Greetings is able to buy them at attractive prices.
Fine so far, but what do we need to watch out for? There are, of course, risks associated with acquisitions, but in this case the deals are fairly small and complementary. The UK market has been particularly tough lately, with International Greetings’ 9% operating profit margins being squeezed. This pricing pressure led to a profits warning in August that sent the shares diving by more than 35%.
I think this was an over-reaction; the board believes that pre-tax profit for the year to March 2008 will still be around £17m, giving underlying earnings per share of 27.2p. That puts the shares on an attractive p/e ratio of around ten and a 3.7% (or 10p) dividend yield. Net debt of roughly £40m is a slight concern, but interest payments are covered a comfortable six times. I rate the stock a buy – as do at least six of the directors, who bought a total of 120,000 shares at 255p in September. By March 2010, the board believes International Greetings can increase earnings per share to above 40p, with non-UK operations accounting for 55% of turnover.
Recommendation: BUY at 267.25p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments