A Rare Opportunity To Buy AmEx On The Cheap

I have owned and followed American Express (AXP) for many years. In that time, I think the only time I purchased it this century was just after 9-11-01. It is rarely cheap, because it is a great business and a great franchise and everyone knows it. You need some serious fear to get this company on the cheap. 9-11 provided one such opportunity, when it plunged for a very short time to $24.20 per share.

I thought Thursday morning was a great opportunity when AXP dropped on Capital One's announcement. Remember that COF has a banking arm and is directly exposed to the mortgage mess. It also has a much less affluent client base than AXP, lower average FICO scores, and its balances revolve, whereas most of AXP's balances require monthly payment. In other words, AXP has a "spend-centric" model where they earn the majority of their revenue from the so-called discount fees earned each time a customer buys something with their card. Loan interest is a secondary revenue stream.

So I bought some AXP for some managed portfolios, and watched the stock climb the rest of the day. Then the 4pm press release hit that indicated AXP expected a weaker 2008 due to reduced consumer spending and more write offs. Great timing on my part, but in a few years or less it won't matter much in my opinion. I bought some more Friday morning as the market knocked another 10% off the stock, even though AXP still sees double digit topline growth in '08.

Let's compare AXP's current valuation to that immediately after 9-11. A major concern then was that AXP was leveraged to the travel industry, but it is far less so today. AXP had earned about $2 the year before, and earned about $2 the year after. So it bottomed at a little over 12-13x earnings. Today, at $44, and assuming '07 earnings of about $3.40 and '08 earnings of $3.50 or a bit more (earnings comparisons in '08 are affected by some one-time items in '07, so growth looks lower than it is), it valuation right back at post 9-11, sub-13x levels.

AXP is a fantastic worldwide franchise that would be impossible to replicate. It will benefit from increasing global affluence. It has growth prospects and returns on equity far better than the market. I think this one should be bought and put away for the long term. As usual, it could go lower in the near term, but for longer term investors, it is a rare opportunity indeed.

One final point: You don't have to take my word for it. Just look at who holds AXP in their portfolios - it is a veritable rogue's gallery of the best investors on the planet: Buffett, Greenblat, Davis, Eveillard, Olstein, Ruane Cuniff, Dodge & Cox, Gayner. Joel Greenblat, arguably one the finest value investors ever whose hedge fund has averaged 40% annually for more than 20 years (achieved not with smoke and mirrors, but with good old fashioned stock picking), and author of the must-read "The Little Book That Beats the Market", had 16%(!) of his multi-billion dollar portfolio invested in AXP as of his September filing. So - who to side with here - a bunch of scared sheep (the market) or the best investors of all time?

Tough choice...

Disclosure: Author is long AXP

Comments

[Long-Short Guy:]

This all makes a lot of sense. Only problem is that it's exactly what E*Trade said: we only have high FICO loans on our books, we don't do subprime, our customers are wealthier... And look what happened.

2008 Jan 13 02:38 PM

[texalope:]

Ben graham used Book Value as a metric to determine a company's value. He believed anything above 30% over book leave you hostage to the vagaries of the market.
On a historic basis this stock is at the higher end of its book value ranges. From a classic value perspective there is no margin of safety in this price.
I agree it's a great franchise. I believe it has distince competitive advantages and great earnings power value. I also think that the replacement value of it assets is much higher than book which doesn't accurately reflect the investment made to create this company reputation over its long history. I agree that the stock is depressed from what it was. I don't think there is a margin of safety.

2008 Jan 13 04:46 PM

[Desperate.:]

I have nothing against Amex, no positions here, but I think the 9-11 comparison isn't really a good one to use here. 9-11 was a surprise attack that caught everyone off guard. No one saw that coming and what would happen immediately afterwards.

What we're beginning to see is that the "subprime bubble" might actually be a "consumer bubble" with people living well beyond their means for too long. Subprime is sure a big part of it, but you don't hear much (yet) about the credit card debt and loan debt people made in the same timeframe.

For every subprime loan that was made on overinflated home, how many HELOCs were taken out to their max values in the same timeframe?

Cracks are starting to appear and they could spread a lot quicker now that the dam is bursting.

I don't doubt that Amex will be a good company to own in the future, i'm just not sure you won't be better off waiting on the financials. I do not believe this is a "rare opportunity" at all.

2008 Jan 13 06:57 PM

[rodcore:]

You're right, but why buy today for $44.00 when I will get it 6 months from now for $37.00?

2008 Jan 13 06:58 PM

[TA:]

You buy some now and hope for a pull back so you can get more. You have no idea if it will hit $37.

Great call btw - well worth a look if I wasn't already playing that game with other financials

2008 Jan 13 09:43 PM

[JRak:]

Not to mention CEO Ken Chenault's options on 1,375,000 shares of AMEX, with another 1,375,000 in options in the works to be granted later this month. The conditions on both grants being that the stock's EPS must grow at 15% a year for the next 6 years in order for him to get the full benefits of both awards. Fortune has an article on it in this month's issue.

2008 Jan 14 01:03 AM

[Amadeus:]

Keep up the great ideas, buying this stock now is a wonderful move, I need a counter-party in order to sell this stuff short... Aside from horrific technicals, consider the looming danger of defaulting credit card debt... Unlike MA or the soon to be IPO Visa, AMEX is a creditor, not just a service provider... Other wonderful franchises to buy include BAC, AEO and a whole host of other financial/retail firms tied to the contracting American economy... keep it up ace.

2008 Jan 14 01:40 AM

[frcf:]

Agreed, never thought I'd see AXP at p/e of 13. I unfortunately bought to early a few weeks ago. They have huge exposure to the fast growing economies of the world. I will add to my position here. So many great value inestors own it:

www.dataroma.com/m/sto...

No doubt they will use this opportunity to add to their positions.

2008 Jan 14 02:43 AM

[tkenyon:]

Lots of good comments, lots of controversy, that's why it's cheap. One could argue that all the negatives everyone cites are well known by the market, and hence priced in. 9-11 was such a "black swan" that it was not priced in, and the market over reacted to the downside. Yet you now have it trading at a similar multiple. Remember too that it had the lousy financial advisors business back then too. The comments about Chenault's options is a good one. I also agree that scaling in makes sense - there could well be more bad news before there is good news. Value investors are notoriously early...

2008 Jan 14 07:30 AM

[Dan Jacome:]

negative surprises are rarely single quarter events

2008 Jan 15 12:00 AM