American Express (AXP) survived the financial crisis well, which is indicative of a very strong company in an industry that saw significant trouble in recent years. When analyzing a company within the financial sector, one must look at its fundamentals to gain a picture of the level of risk the company presents, and to determine whether there is an opportunity for profit based on the company's value. By using a ModernGraham analysis, one can systematically find traits of the company that can be compared to other potential investments. What follows is a look at how American Express fares in the ModernGraham valuation model.
Defensive Investor – must pass all 6 of the following tests: Score = 4/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$58.65|
|Value Based on 0% Growth||$34.38|
|Market Implied Growth Rate||7.02%|
Balance Sheet – 9/30/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Since I rated American Express as undervalued last October, it has risen over 13% to now priced by the market within the margin of safety. The company is suitable for the Enterprising Investor but not the Defensive Investor, because it currently trades at high PEmg and PB ratios. As a result, Enterprising Investors wishing to follow Benjamin Graham’s methods should feel comfortable proceeding with further research to determine if American Express would be good for their individual portfolio, beginning with a review of a competitor through looking at the ModernGraham valuation of Capital One Financial (COF). As for a valuation, though the company missed most analysts' forecasts for Q4 2013 earnings, it actually did better than the ModernGraham valuation model expected (I believe it is important to be very conservative when estimating future results, as it is better to have an estimate of intrinsic value which is too low than to have an estimate that is too high), and the valuation has improved slightly since the last review. EPSmg (normalized earnings) grew from $2.42 in 2009 to $4.04 in 2013, a level of growth that supports the market’s implied estimate of 7.02%, and the company currently appears to be fairly valued.
Disclaimer: The author did not hold a position in American Express (AXP) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.