American Express Company (NYSE:AXP) has recovered well from the financial crisis, and maintained solid earnings throughout the period. This fact alone may intrigue many potential investors, as many believe in investing in great companies regardless of the price. However, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how American Express Company fares in the ModernGraham valuation model.
The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation, in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method, one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries.
AXP data by YCharts
Defensive Investor - Must pass all 6 of the following tests: Score = 5/6
Enterprising Investor - Must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3
|Value Based on 3% Growth||$67.74|
|Value Based on 0% Growth||$39.71|
|Market Implied Growth Rate||5.15%|
Balance Sheet - June 2014
Earnings Per Share
Earnings Per Share - ModernGraham
AXP Dividend data by YCharts
Enterprising Investors following the ModernGraham approach should keep a keen eye on American Express and pour some time into conducting further research. The Defensive Investor may not feel the same way, with concerns regarding the high PB ratio. However, Enterprising Investors have no initial concerns, and should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
To determine an estimate of the intrinsic value, one must consider the company's earnings. Here, the company has grown its EPSmg (normalized earnings) from $2.64 in 2010 to an estimated $4.67 for 2014. This is a high level of growth, approximately 15% each year. Even adjusting for a margin of safety to assume the company will not do as well in the future, a conservative growth estimate may be around 11.5%, which is well below the market's implied forecast of only 5.15% earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model returns an estimate of intrinsic value well above the price, supporting a clear conclusion that the company is significantly undervalued. Enterprising Investors are therefore encouraged to proceed with further research to determine whether American Express is suitable for their own individual portfolios.
Be sure to check out previous ModernGraham valuations of American Express Company for better perspective.
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