About the Company
For a company with a history spanning over 150 years, American Express (AXP) certainly needs no introduction. However, to put things into perspective, I present here a brief outline of their businesses and operations.
American Express is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. Their principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world.
It is principally engaged in businesses comprising four reportable operating segments: U.S. Card Services, International Card Services, Global Commercial Services and Global Network & Merchant Services.
Recent financial performance
The company reported third-quarter net income of $1.4 billion, up 9 percent from a year ago. Diluted earnings per share were $1.25, up 15 percent from $1.09 a year ago.
Consolidated total revenues net of interest expense rose 6 percent to $8.3 billion in the third quarter, from $7.9 billion a year ago. The increase was driven by a rise in Card Member spending and higher net interest income that reflected lower funding costs and growth in Card Member loans.
"Despite an uncertain environment, we generated a healthy increase in revenues and stronger Card Member spending across all regions this quarter," said Kenneth I. Chenault, chairman and chief executive officer. "Spending on our global network rose 7 percent (9 percent adjusted for currency translations) and Card Member loans continued the modest growth rates we have been seeing for the past several quarters.
Credit quality indicators remained at historically strong levels," said Mr. Chenault. He further added, "And, year to date, we are delivering on the annual targets we set to contain operating costs. The combination of top-line growth, credit quality, a strong capital position, and continued vigilance on expenses produced a 15 percent increase in earnings per share. It also gave us the flexibility to make substantial investments this quarter in marketing and other initiatives to position our business for the years ahead."
A comparative analysis proves that AXP is trading far below its major competitors Visa and MasterCard from price to sales, price to book and price to earnings multiple.
To value the company from a relative standpoint, following are my assumptions-
- The company recorded a basic EPS of $3.91 for the fiscal year ending 2012.
- Multiplying the fiscal year ending 2012 EPS to MasterCard's PE ratio (3.91 X 30.1 = $117.69), the company should be trading at a value of $117.69, an upside of ~38% from the current market price.
- For the base case, I shall compute the relative value based on the average price to earnings multiple of the top 3 players in the segment.
- The average price to earnings multiple is 25.54, the value we derive using the average P/E ratio and fiscal year ending 2012 EPS is (3.91 X 25.54 = $99.86), which gives you an upside of ~15% from the current market price.
Catalysts and risk factors
- Massive increase in the number of people opting for cashless modes of payment, and with the existing communication channels improving and connectivity vastly improving, the number is only set to increase.
- Massive growth potential in key emerging markets of India and China which occupy a very important position in the company's long-term global growth strategy, are both humongous in size, but charge and credit is an almost infinitesimally small part of the mode of payment used by the masses.
- The Dodd-Frank legislation has been a matter of much debate and discussion over the impact it could have on the top line of the various stakeholders involved. American Express in its latest effort on boosting profits from processing card transactions has taken a queue from Dodd-Frank Act and has launched its series of online prepaid cards in a bid to broaden its base and seek profits from Dodd-Frank's exemption on debit fees.
AXP is a company which has out-maneuvered the financial crisis through dealing only with the most credit worthy customers.
With the American economy's macro-economic indicators showing signs of a recovery, the company has taken a number of initiatives to aggressively and smartly respond to the changing regulatory climate.
Going forward, I believe, AXP is a fundamentally solid stock and deserves a place in the value investor's portfolio.