American Express – Will Growth Resume?
|March 22, 2016||Posted by Oddmund Grøtte under Stock Analysis|
Share price today: 61 USD
American Express (tickercode AXP) shareholders has had a tough ride the last 18 months. From a high of 95 in 2013 and 2014 it has gradually fallen to a bottom of 52 in February 2016. Since then it has climbed back to current price of 61. The other two big credit card companies; Visa (V) and Mastercard (MA), is in stark contrast: they have performed a lot better. I bought AXP in February at 56 because valuation seemed to me like a bargain. At 61 I still think the price is cheap. Read below for finding out why.
AXP is registered as a bank, approved in 2008 (AXP received TARP funds). But the company is most famous for its credit cards. These cards are geared towards the spending habits of the customers and receive certain privileges that other people may not receive. Half of its revenue comes from merchants, charging them a discount rate for every transaction made. The other major source is from the cardholders themselves, who pay annual fees and interest charges on balances. Historically, its customers on average have spent much more than competing cards (V and MA). Its cardholders are supposedly more affluent than V’s and MA’s. In 2014 AXP card holders spent on average 144 USD per purchase while V only had 84 USD. Due to this AXP has been able to charge a higher discount rate over its competitors. The combination of higher discount rates and more big-spending customers means that AXP earns more per “swipe” than V and MA. AXP has over the years tried to brand itself that its cardholders are superior to those who are using other plastic cards. This branding has made it tremendously profitable.
It was founded in 1850 under a much different premise than today (express mail service, hence the name). At the same time it also developed the “traveller’s cheque” and gradually transformed into a financial company.
Personally I have never had an AXP card. Always had debit (never credit) Visa or Mastercard.
Let’s start with the CAGR number since 31.12.2006:
|Revenue USD Mil||2.395586|
|Operating Income USD Mil||4.067396|
|Operating Margin %||1.623656|
|Net Income USD Mil||3.368438|
|Earnings Per Share USD||5.380928|
|Payout Ratio %||0.516909|
|Book Value Per Share USD||9.396263|
|Operating Cash Flow USD Mil||1.995311|
|Cap Spending USD Mil||5.759649|
|Free Cash Flow USD Mil||1.573329|
|Free Cash Flow Per Share USD||6.014548|
As you can see: splendid numbers.
Worth noting is the company’s ability to generate free cashflow: On average 26% of the turnover ends up as free cashflow! It’s quite close to a milking cow as you can get in the stock market. Capex is very low.
Thus, the returns on capital is very high:
But if all is rosy, why has the stock gone down? Wall Street disagrees and says all is not rosy at all. AXP has fallen from a top of over 90 USD to todays price of 61 USD. In February it bottomed at about 52 USD.
There are lots of uncertainties about the franchise right now. The most important thing that happened in 2015 wast that AXP lost Costco (COST) and JetBlue portfolios. AXP and COST was exclusive partners with a co-branded card for about 16 years before COST got better deals from V and Citibank. 10% of AXPs card holders were co-branded by COST. If AXP loses more of co-branded stocks it may signal a shift in the brand value.
Excluding loss of COST and JetBlue, loans are up 7%. This means the loss of COST is recovered in slightly more than two years. Spending per card was flat in 2015 . However, considering the strength of the USD, this is not all bad. The swipe fee from each transaction declined from 2.44 to 2.42%.
At the annual investor day 10th of March the company reiterated the business outlook for 2016-17: EPS will be in the range of 5.4 to 5.7 for 2016 and at least 5.6 for 2017. Despite lower expectations, cashflow is still rock solid and expected operating cashflow is estimated to 8 billion. Deducting capex of 1.4 and dividends of 1.3 billion, there is still 5.3 billion in free cashflow. This can be used to buy back shares. Now stock price is cheap and I expect the company to increase buybacks.
Buffet (via Berkshire) is AXPs biggest shareholder with 15%. It’s unlikely that AXP management will move or shake up the company without Buffet’s endorsements. Buffet is unlikely to do any changes just because share price is falling. As a matter of fact, buffet prefers the stock of a great company to go down so he can purchase more shares at a cheaper price. In the most recent letter to shareholders Buffet reiterated his view on AXP saying it possess a good business with capable management.
Balance sheet analysis:
Not much to say about this. This is a bank and financial company and financial gearing is to be expected.
AXP pays 29 cents a quarter (1.16 annually). At current prices AXP yields 1.9%, the highest yield since at least 2011. It’s not a dividend aristocrat but dividend has been increased 13% per year since 2000 and been paid out every year. I would assume we can expect growth rate to be slightly lower going forward.
Stock price today: 61 USD
Compared to V and MA AXP is dirt cheap. At 61 PE is about 11. V has PE of 25 and MA 24.
Here is historical PE ratios for AXP:
All metrics indicates AXP is in the lower range of valuations. Thus, I believe an entry at this price offer a reasonable entry into a great brand (at least thus so far). All in all, I can’t see that this is a failing business but rather a nice entry point for long term investors.
AXP is dependant on the overall growth in the economy. However, both in 2008 and 2009 the company made huge free cashflows. Thus, AXP is a fantastic example that the stock price can disconnect from the health of the business. In 2008 AXP fell about 75% before it reached a bottom. AXP received over 3 billion from TARP but I have not investigated how bad the situation was at the time. I believe one of the reasons it became registered as a bank was to get TARP.
As I see it, at this price, the biggest risk is the whole financial system. As far as I can see nothing has improved since 2008, quite the contrary. The interlinking in the system and printing of fiat currencies have made the system just as fragile as it was back then. The risk for sovereign problems is huge. And interest levels are rock bottom which means the toolbox is basically empty. Hence, any hiccups in the financial system could be a threat for AXP.
The big question is if AXP is gradually losing its brand power and this leads to pricing pressure. Now there is a lot of negative sentiment about the stock. However, you must buy when investors are negative. I bought the stock myself and will hold until I eventually see a clear deterioration of the business. As of now I see this is a golden opportunity to get in at a cheap price for this so far wonderful franchise. All these questions mark is exactly why the stock is down. As Buffet says: “uncertainty is the friend of the buyer of long-term values”. If there are no uncertainties, of course the price would be much higher.
I am long AXP shares.
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