American Express (AXP) has several plans to boost its overall earnings. It entered a joint venture with Certares to transfer 50% ownership of its low profitable division -- Global Business Travel, or GBT. American Express's GBT division provides various services including travel solutions, integration of consulting services, and facilitating end to end meetings and event capabilities. GBT is an important division for American Express, with operations in 138 countries. GBT services are provided to corporate customers that have a travel spend estimate of more than $19 billion a year.
Last month, American Express reported that it will sell 50% of the division to an investor group led by Certares Bank. This group is expected to invest between $700 million and $1 billion to expand the division. After this investment, the division is expected to be valued at around $1.4 billion to $2 billion. We think this joint venture will further benefit the global corporate payment services. The new investment from Certares will also be used to offer new products, services, and capabilities.
The table below details travel sales in the U.S and globally for American Express.
Quarter | Travel Sales ($ Million) under U.S. card services | Commission rate | Travel Sales ($ Million) under international card services | Commission rate |
Quarter Ended June 2013 | 6.7% | 354 | 6.8% | |
Quarter Ended March 2013 | 6.4% | 340 | 6.8% | |
Quarter Ended December 2012 | 7.8% | 367 | 7.4% |
The travel sales business has consistently risen in the U.S. in the last three quarters, but the percentage of commission hasn't grown accordingly. On the other hand, under its International card services, the travel sales didn't show any significant growth in the last three quarters.
The main reason for entering into a joint venture for GBT is to witness better profitability. The division's after tax profit margin was between 5% and 10% in the first half of the present fiscal year, but American Express's overall after tax profit was 17%. With this joint venture, American Express expects to witness better results in its bottom line in the coming quarterly results.
The company stated that the joint venture transaction will be completed by the second quarter of 2014. Moreover, the Certares CEO is co-chairman of the Travel Leaders Group, and the group's annual sales have tripled to $18 billion since 2008. This is a good indication for American Express, as the Travel Leaders Group subsidiary units control one-third of the U.S. travel agencies.
Stock repurchase program in line to achieve EPS target
The company plans to repurchase shares worth $1.8 billion for the remainder of 2013. It has the financial target to foster EPS growth of 12% to 15% in the coming fiscal year. With respect to last three fiscal years' results, the company witnessed average earnings growth of 6.23%.
If American Express achieves this earnings estimate, then the company's overall earnings will be $4.76 billion by the end of the present fiscal year. We believe American Express can achieve this earnings target since it has achieved more than half of this estimate in the last two quarters cumulatively. With this, its EPS will be $4.36 by the present fiscal year's end, without making any share repurchases. This will foster 11.5% EPS growth year over year, which is very close to its EPS target of 12%.
With respect to returns, American Express has given satisfactory results compared to its peers Visa (V) and MasterCard (MA). The year to date capital returns witnessed by the companies are given below:
AXP data by YCharts
While going through the above chart, we can easily infer that American Express has given considerable returns of 32.5% year-to-date. Among its peers, MasterCard gave the highest returns of 41.83%. On the other hand, Visa gave slightly lower returns of 28.65%.
What does the valuation say?
Comparisons on various multiples for American Express with its peers are given below:
Company | TTM Price/Sales | TTM EV/Revenue | PEG ratio (5 yrs expected) |
American Express | 2.63 | 3.77 | 1.29 |
Visa | 10.55 | 10.36 | 1.34 |
MasterCard | 10.33 | 9.74 | 1.38 |
With respect to sales, American Express's price is 2.63, which gives an indication that this company is generating better sales than its peers. On the other hand, American Express's revenue generation with respect to enterprise value is considerably lower compared to its peers. This means that American Express is generating revenue at a higher pace than its peers with respect to enterprise value. Moreover, American Express's PEG ratio with respect to the five year growth period is also satisfactory and the lowest amongst its peers.
Conclusion
Through the joint venture in its GBT division, American Express is planning to improve the segment's profitability. Driven by these fundamentals, we believe American Express can provide considerable capital returns to the investors. We recommend a buy on the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.
