By Matt Doiron
Billionaire Ken Fisher's Fisher Asset Management recently filed its 13F for the first quarter of 2013, disclosing many of its long equity positions as of the end of March. When we went through the asset manager's largest holdings by market value, we noticed that one new name among the top five was American Express (AXP); Fisher increased its position from about 9 million shares at the beginning of January (find more of Fisher's favorite stocks from the beginning of the year) to nearly 11 million shares at the end of last month.
American Express grew its non-interest revenues by 5% last year compared with 2011, with net interest income increasing at a similar rate (non-interest revenues were 85% of the total). However, larger provisions for loan losses and increased expenses contributed to the company's net income declining by 9% (though earnings were still up considerably from 2010 levels). The fall in earnings appears to have been particularly sharp in the fourth quarter of 2012. During the year, American Express used about $4 billion of cash to buy back shares, a much larger repurchasing program than in previous years and accounting for about half of cash flow from operations.
At its current market capitalization of $72 billion, American Express trades at 17 times trailing earnings. Even with the company potentially continuing to repurchase shares, we'd prefer to see that accompanied by actual earnings growth rather than be the sole source of EPS improvements. Analyst expectations imply a forward P/E of 12, suggesting that the sell-side is forecasting a quick recovery in net income over the next couple years.
Our database of 13F filings shows that at the end of the fourth quarter of 2012 Warren Buffett's Berkshire Hathaway owned over 150 million shares of American Express; this made it one of Buffett's top five holdings at that time (see Buffett's stock picks). First Eagle Investment Management was another major shareholder, reporting a position of over 10 million shares (check out more stocks First Eagle likes).
Peers for American Express include Discover Financial (DFS), MasterCard (MA), Visa (V), and Capital One (COF). Of these four stocks Discover and Capital One are the most appealing to a value investor at first glance, with trailing earnings multiples of 10 or lower. Their most recent quarterly report also showed decent numbers, with both revenue and earnings increasing in each case compared to the same period in the previous year, though Capital One was aided to that effect by acquisitions. Even though the sell-side is expecting little growth at each company going forward, we think that the stocks are cheap enough to make them worth considering from a value perspective.
Visa has been growing nicely; in the quarter ending in December, the first of the company's fiscal year, it reported double-digit growth rates on both top and bottom lines versus a year earlier. However, the valuation at the credit card company is much more aggressive than at Discover or Capital One, with the forward earnings multiple being 20. Similarly, MasterCard trades at 18 times forward earnings estimates- its net income rose at a very high rate in its last quarterly report compared to Q4 2011, but revenue was up only 10% and that actually looks a bit low considering where the stock is trading.
MasterCard and Visa do have strong brand names, and merit something of a premium for that, but there is a very large cap between them and the other two peers we discussed. We'd think that in order for them to justify their valuation, there would have to be more general improvements in the industry which would help the other players as well. As for American Express, it appears that the value status of the stock is dependent on whether or not it hits its analyst targets over the next couple years- it actually looks pricy going by recent results, but the forward P/E is quite low- and so we think that investors should wait for more results before deciding if they want to follow Fisher here.