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American Express (AXP) made headlines in February, when it was named by Fortune magazine as one of the world's most admired companies for 2013. However, despite its admirable reputation, its revenue and market share is still lagging behind its major rivals in the industry. Some investors question whether the company can grow enough to overcome the competition.

Recent News

American Express announced recently that it will be joining forces in Asia by launching the Citi PremierMiles American Express Card in Malaysia. This partnership will enable Citibank to issue cards in the Asia Pacific region, which will be accepted using the American Express global merchant network. This has very strong growth potential for the company as it will open the door to the rising economies of the Asia Pacific region.

The share price of American Express has moved up by 24.5% over the past year. Its rivals MasterCard (MA), Discover Financial Services (DFS) and Visa (V) garnered share price changes of 40%, 23% and 33% respectively. As the U.S. economy continues to recover, most of the major U.S. indices are touching new highs. Financials, in particular, are set to benefit from this upswing, which has been reflected in the price movements of these companies in the recent past.

Financial Ratios and Analysis

Revenue growth is currently at 2.10%, which is lower in comparison to the industry's average of 13% indicating decline in demand and a relatively lower market share.

EBITDA margin is at 24.72% and the company has been maintaining margins in this zone for the past few quarters. Higher EBITDA margin translates into more profit for the company since lesser operating expenses are eating out the company's bottom line. Moreover, it reflects the company's operational efficiency.

Higher revenue growth combined with higher EBITDA margin signifies a good indicator as it reflects more profit and increasing demand for the company's products. MasterCard , Discover Financial Services and Visa Inc. showed higher revenue growths of 9.7%, 9.3% and 14.74% respectively. Meanwhile, their EBITDA margins are also higher than American Express at 57%, 48% and 60.91% respectively.

American Express's revenue growth and EBITDA margins are growing below the industry's average due to tough competition. Management is trying hard to sustain its position in the industry by diversifying in to major markets across the globe.

However, net income for the second quarter increased by 1.91% from same period of the prior year, which is even lower than the revenue growth achieved by the company for the period. This indicates poorer management of operational expenses by the company.

The company's quick ratio is at 2.1, indicating that there are restrictions to raising enough liquid assets to cover up its short-term needs.

Net operating cash flow increased to $341 million, a significant increase of 73.97% compared to the same quarter last year. This is extremely higher than the industry's average cash flow growth rate of 0.58% indicating the company's ability to generate sufficient cash flow to maintain and grow its operations.

Industry Comparables

The P/E ratio is at 17.91 compared to the industry's 19 showing that it's currently trading at a reasonable price. On the other hand, Price to Earnings/Growth (PEG ratio) is at 1.37, which is better than most of the companies in the sector. This indicates signs of stronger growth, which can lead to higher price multiples.

Price to Book is currently at 4.3 against the industry's average of around 4, signifying that it's potentially trading at a slight premium price.

Dividend yield as shown in the chart below is the lowest among its major rivals. A higher dividend yield indicates higher cash flow for investors.

(click to enlarge)

Recommendation

I would recommend buying American Express for several reasons. Its outstanding net operating cash flow performance which, surpassed the industry's average, shows a level of efficiency and cash generation, which bodes well for the company. Net income and revenue are still increasing despite being lower than its rivals. Stock prices are still soaring for the company, increasing its appreciation potential. Earnings per share also increased showing its outstanding earnings capability for investors.

The company has been facing tough competition from its peers and has been significantly losing market share. The company's diversification into other markets and products in the recent past is a good move and that may help the company to generate higher revenues. Well managed, stable companies like AXP can turn into great investments. Although AXP may not be leading the pack in its peer group, that does not mean it is a bad investment. The opposite, in fact, may be true as many investors overlook AXP due to some of the lower ratios and metrics.

Source: American Express: A Cash Flow Powerhouse