American Express Shares Deserve Serious Consideration

| About: American Express (AXP)

The Manual of Ideas has put together a one-page snapshot of how American Express (NYSE: AXP) actually makes money. We have tied some of the company's key operating metrics to AXP's income statement to show you the key drivers of AXP's profitability.

Our Bottom Line on American Express

American Express is a quintessential Buffett company—a high-ROIC business with a wide, defensible moat and favorable long-term growth prospects. The ongoing financial crisis has created a rare opportunity to buy this business for less than 10x trailing earnings and less than 2x tangible book value.

While it is instructive to contemplate worst-case scenarios for AmEx in the current crisis, we have little doubt the company will survive without material dilution of equity holders. Meanwhile, AmEx’s long-term earning power and competitive advantages have not been impaired. As a result, the shares deserve serious consideration.

Investment Highlights

  • Premium brand in payments industry, focused on prime customers. Since launching the American Express card in 1958, the company has built a brand that today encompasses 70+ million cardmembers.
  • “Spend-centric” business model. AmEx focuses primarily on member spending and secondarily on finance charges. Spending per cardmember is higher than at Visa or Mastercard, enabling AmEx to charge a higher discount rate. This allows AmEx to offer rewards to cardmembers and marketing programs to merchants, which help boost spending.
  • Targeting long-term revenue growth in high single digits, EPS growth in mid teens, and ROE in the mid thirties. Management has articulated the goal of growing revenue, net of interest expense, by at least 8%, and EPS by 12%-15%, “on average and over time.” The company targets 33-36% ROE.
  • Ken Chenault has been chairman/CEO since 2001.
  • Improved liquidity by raising $6 billion from new retail CD program and $3 billion from the Treasury.

Investment Risks

  • Operating environment “among the harshest we have seen in decades.” The company has recently fallen well short of its prior forecast of 4-6% EPS growth. Loss reserves have increased to highest level in three years. Nonetheless, the company remained profitable in Q4 and full-year 2008.
  • Maintains “cautious” outlook for ‘09 and expects cardmember spending to “remain soft with past-due loans and write-offs rising from current levels.”

Major Holders

Insiders 1% │ Berkshire Hathaway 13% │ Davis 7%

Business Overview

Founded in 1850, American Express is a global payments and travel company. It operates in two groups:

Global Consumer (67% of revenue) includes proprietary consumer cards, customer service, small-business services, prepaid products, and consumer travel. Sub-segments are U.S. Card Services and International Card Services.

Global Business-to-Business (29% of revenue) includes the merchant business, network services, commercial card, and business travel. Sub-segments are Global Commercial Services and Global Network & Merchant Services.

AXP became a bank holding company last November.

Disclosure: No position.