Ten Reasons to Like American Express

I purchased 1,000 shares of American Express (AXP) yesterday, mainly based on valuation. AXP is a leading global credit card, payments and travel company. Its two main businesses are:

• Global Consumer group: US and international credit card services, Travelers checks, consumer travel etc.
• Global Business-to-Business group: Corporate Employee Card, Corporate Purchasing, American Express Business Travel, Global Network and Merchant Services.

Here are some things I like about AXP:

1. AXP has one of the top global brands. It attracts high-spending, creditworthy customers who are attractive to banks that issue credit cards. Since AXP won the anti-trust suit in 2004, many banks have started offering American Express branded cards.
2. There is a worldwide trend to use credit cards instead of cash, which has boosted the stock prices of Visa (V) and MasterCard (MA), but AXP should also be included in this group, especially longer term as India and China produce more upscale consumers.
3. AXP is a Warren Buffett stock that usually sells at a premium PE. But it was available yesterday at a forward PE ratio of only 11.5 times earnings.
4. Return on equity has been running over 35% per year.
5. Zero sub-prime exposure.
6. High free cash flows and rock solid balance sheet.
7. Shareholder friendly. AXP pays a growing 1.7% dividend and management also returns 3-4% a year via share buybacks.
8. Great Sponsorship: Aside from Berkshire Hathaway, AXP is the #1 holding of Blue Ridge Capital (Griffin) and large positions are held by Clarium Capital (Thiel), Eton Park Capital (Mindich) and Tweedy Browne among others.
9. High lending standards.
10. The travelers check business is a true cash cow.

Normally I like to use a covered call strategy with blue chip stocks, but AXP is just too cheap. I think it is worth at least $55/share (currently trading near $41). I would consider writing covered calls against my position if AXP were to trade up to 50 or higher in the next few months.

Full disclosure: I am long AXP shares.

 

Comments

[Vox Rationalis:]

Prospective investors should be aware that AXP is facing rising delinquencies and a tougher credit market, just as is every other lender. Certainly, AXP is less susceptible to this problem than for example COF, but it's not immune, and has significantly increased its loss provisions in the last quarters.

I'm not saying to stay away, just to have your eyes open.

2008 Jun 24 08:23 AM

[Skip Olinger:]

While I am also long AXP and agree that it is very cheap, I think you missed the main issues about the stock. Mastercard and Visa are payment processors only; they do not have loan exposure to their card holders. The issuing banks carry that exposure. With AXP, they not only have their own processing network, they carry the loan exposure on their books. With a mortgage, you at least have a house to collateralize the loan which may, at some point, be worth something. A credit card is unsecured. Therein lies Mr. Market's concern and why the stock is cheap. There is justifiable concern that things are going to get worse for Mr. Consumer and more people will default on their credit card debt.

That said, as you point out AXP has a very high end client with some of the highest credit scores in the industry. They also have an award system that keeps Mr. Consumer locked into using the Amex card and if he becomes late, he loses his points. Amex has been through tough periods before. In 1991 I think their loss rate went up to 9% of their outstandings. (check the recent presentations on their website). Their current reserves are around 6% and they have better quality receivable now. The company should be on top of this issue. And, there are a lot of very smart guys who agree that they do.

I personally think this is an understandable company, unlike AIG or Citi; they have very good management and I doubt you will ever get this company this cheap again. But, it may be awhile before Mr. Market recongnizes it. The risk is that Mr. Consumer falls out of bed and is killed. In that case there may be a lot more write offs than is now predicted. But that's the wager right now.

2008 Jun 24 09:07 AM

[George Spri...:]

user164258- You make some good points about AXP's additional risk exposure versus Visa/MA. But there are some advantages in having more control front-to-back. They have a great exclusive relationship with Costco that would be hard for Visa/MA to match. Another thing about AXP's card holders that I like is that most of them pay off their balances every month, so the relative exposure per client tends to be pretty low. They make most of their money on vendor fees rather than credit card interest.

2008 Jun 24 02:05 PM

[user1234:]

I agree that unlike other banks AXP have better job on screening their card holders. And these are the type of card holders that normally cleans out their statement balances every month. But these would leave AXP not benefiting from the penalty or some finance charges that other banks would normally get when card holders are defaulting in their payments. That's were banks would get huge percentage of their income from.

Like Visa or MA, they also benefit from the transaction fees that goes into the card everytime the users swipe it. But they don't have the volume that visa and mastercard have.

Also, my last concern is that i just found out that AXP's Equity (ROE) growth is just like 8% based from last year and Return of Invested Income (ROIC) growth was just like 3.8%. I dont think these numbers are ever good enough.

2008 Jun 24 10:10 PM