LLast day, after having a look at the Financial Times I realized American Express ( ticker simbol AXP:NYSE) was about 12% down. What was going on? After reading the news I realized it was an earning miss, but at first sight the market reaction was overwhelming. American Express has been on my watchlist for a long time. It has a very long history, good return on equity, good stability of earnings, a growing, well covered and systematic dividend; but on the negative side I noted a very high P/B, P/E and D/E. Anyway I made up my mind to have a complete review of the company.
After a brief company info; I will have a look at the most important financial and sentiment indicator; afterwards we try to have a company fair value using a couple of financial evaluation model; I will try and analyze the competitive position and finally give a final conclusive outlook.
COMPANY INFO
The American Express Company (NYSE: AXP), is a global financial services institution whose main offerings are charge and credit cards. American Express earns about half of its revenue from merchants, charging them a discount ratefor each transaction processed. The other major source of revenue is cardholders themselves, who pay annual fees and interest charges on balances (source wikinvest) So this is the main business model. The average cardholder spends as much as $12.000,00 per year , has better credit rating compared to other credit card company competitors and American Express charges as much as twice compared to other direct competitors. Competitive forces should reduce these margins in the future ahead anyway.
SENTIMENT ON THE STOCK
After giving a look at the yahoo finance site we see the most recent analyst review we have 5 strong buys, 5 underperform and one sell; so the overall rating is 4; strangely the sentiment is relatively high on the stock; this is negative factor if we want to employ a contrarian investing approach.
(SOURCE: FINANCIAL TIMES LTD)
FINANCIAL RATIOS and Metrics
trailing p/e= 13,8 P/B = 2,57 Roe = 25 ( estimated) Interest coverage : 6.7 (from value line) average free cash flow yield = 10% EV/ Sales = 2.72 Operating Margin = 26% AVerage Capital Spending: 1066 (usd millions)
Payout Ratio: 21% F-Score = 5 Financial Rating: Value Line:A++ , Total Debt/ Total Activities = 87%
Common Equity Tier 1 = 12.4%
These ratios coupled with the facts that we didnt' record an earning loss in the last 10 years and we have a continuous dividend in the last 10 years growing at 8,5% average rate ;we have a relatively undervalued issue; negative factors are
the p/b way above one and the fact that we are dealing with a financial institution and considering the last 2008 financial crisis this might pose some question mark.
the stock does not fully respect the stringent Graham defensive investors parameters; for example the p/b is above 1,2 but considering the NAV is not replete with untangibles and that American Express has a wide Moat, the replacing costs of the distribution networks should increase the book value. Moreover we should also consider that on a relative valuation base the stock appears very undervalued. Look at the following table:
Comparable Companies
Symbol:
|
|
|
|
|
|
P/E:
|
9.90
|
28.01
|
26.80
|
14.85
|
9.96
|
P/S:
|
1.67
|
12.72
|
10.38
|
8.96
|
2.50
|
P/B:
|
2.57
|
5.37
|
15.60
|
1.11
|
1.93
|
( source gurufocus.com)
Major Threats
- the new trend in payments using mobile phones might replace the use of plastic cards
- the network effects is way greater for Visa and Mastercards so the company might lose customer retention
- tighter sector regulations in the credit sector might render the sector less profitable in the future
Business Plan Analysis
Brand Identity: very strong and hard to replicate
Other Barrier of Entry: high , the industry is regulated moreover there is a strong network factor, and heavy investment to build the distribution network and customer retention.
Distribuition: here we have a minus compared to Mastercard, Visa and also Paypal;there is a real threat from new ways of electronic payment modes
Product Useful Life and Product Price: relatively inexpensive product, but it gets a minus because competitors ask for lower yearly commission.
Revenue stream predictability: moderately high, good customer base made of high wealth individuals
Number of Customers: high
Product Cycle; good, I think the sector has a bright future, electronic payments don't have saturated the market yet; I think the company might be able to adapt to new forms of payment by joint ventures or acquisitions.
Product and Market diversification: low diversification
Growth by Acquisition: a great plus we have organic growth.
MANAGEMENT ANALYSIS
Directors & officers
| Name | Title | Compensation | Age | Officer
since |
|---|
|
KennethChenault
|
Chairman of the Board, Chief Executive Officer
|
6.50m USD
|
64
|
1997
|
Mr. Kenneth I. Chenault serves as Chairman of the Board, Chief Executive Officer of American Express Co. Mr. Chenault joined American Express in 1981 and was named President of the U.S. division of American Express Travel Related Services Company, Inc. in 1993, Vice Chairman of American Express Company in 1995, President and Chief Operating Officer in 1997 and Chairman and Chief Executive Officer in 2001. Mr. Chenault serves as a director of International Business Machines Corporation (IBM) and The Procter & Gamble Company. Mr. Chenault is a member of The World Trade Center Memorial Foundation and a trustee of the NYU Langone Medical Center.
|
|
EdwardGilligan
|
President
|
7.56m USD
|
55
|
2000
|
Mr. Edward P. Gilligan is President of American Express Company effective April 15, 2013. Prior to his appointment as President Mr. Gilligan served as Vice Chairman of the Company since July 2007. Prior thereto, he had been Group President, American Express International & Global Corporate Services since July 2005. Mr. Gilligan is a graduate of New York University.
|
|
JeffreyCampbell
|
Chief Financial Officer, Executive Vice President - Finance
|
10.33m USD
|
54
|
2013
|
|
|
DouglasBuckminster
|
President - Global Consumer Services Group
|
3.70m USD
|
54
|
2009
|
|
|
JamesBush
|
President - International Consumer Services
| -- |
56
|
2005
|
|
Management seems competent; BUT insider ownership is low at 1%
COMPENSATION SCHEME
| 2014 Executive Compensation | Compensation vs. Performance (1-Year % Change) |
| | |
| Total Compensation | 1-Year % Change | | CEO Compensation | Stock Return | Revenue
| Return on Equity | Net Income |
| $66,106,048 |
-2.53 %
| | 4.39% | -24.06% | 4% | 4.94% | 9.82% |
INDUSTRY ANALYSIS
| Growth Est |
AXP |
Industry |
Sector |
S&P 500 |
| Current Qtr. |
-9.50% |
-16.90% |
-88.80% |
3.20% |
| Next Qtr. |
23.20% |
16.00% |
-88.60% |
13.90% |
| This Year |
2.00% |
7.10% |
26.30% |
1.40% |
| Next Year |
2.70% |
0.30% |
13.10% |
7.30% |
| Past 5 Years (per annum) |
7.47% |
N/A |
N/A |
N/A |
| Next 5 Years (per annum) |
8.10% |
13.62% |
11.88% |
4.79% |
| Price/Earnings (avg. for comparison categories) |
9.74 |
12.84 |
15.43 |
19.82 |
| PEG Ratio (avg. for comparison categories) |
1.2 |
1.68 |
3.46 |
1.68 |
|
credit card sector is a large, growing, and profitable segment of financial services ( stable and predictable transactions and low capital intensity) ; this is a good plus for finding out a good investment in the sector. Anyway, in the near future it must soon address new emerging challenges and potential disruptions.
VALUATION ANALYSIS (to be continued)
EPV (EARNING POWER VALUE ANALYSIS) this model suggests we should value the stock using the current free cash flow and not future projections; this is a more prudent way of valuing a stock compared to the future free cash flow discount model. One of the basic assumption is that current profitability will be sustained, Future growth is excluded from the analysis. We only take into account the maintenance capital excluding investing capital used for growth.
Using this valuation model we get a value about 51,89 usd per share. So the actual price of the stock should be a fair price to initiate a buy. Indeed as Warren Buffet said once; we should aim to buy good companies at a fair price...
I guess that the murket currently is too pessimistic about the stock and discounting zero growth.
In the second part of the analysis I am going to have a deeper look at the valuation methods and try to work out a modified book value . I suspect the effective p/b is not 2,5 but a lower one
*Disclosure: At the time of this article’s writing, the author did have positions in the companies mentioned.
