ModernGraham Quarterly Valuation Of American Express Company

Oct. 29, 2014 5:37 PM ETAmerican Express Company (AXP)
Benjamin Clark profile picture
Benjamin Clark
5.71K Followers

Summary

  • AXP is suitable for the Enterprising Investor but not the Defensive Investor, following the ModernGraham approach.
  • According to the ModernGraham valuation model, the company is undervalued at the present time.
  • The market is implying 5.15% earnings growth over the next 7-10 years, which is significantly less than the rate the company has seen in recent years.

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 Chart

AXP data by YCharts

Defensive Investor - Must pass all 6 of the following tests: Score = 5/6

  1. Adequate Size of Enterprise - Market capitalization of at least $2 billion - PASS
  2. Earnings Stability - Positive earnings per share for at least 10 straight years - FAIL
  3. Dividend Record - Has paid a dividend for at least 10 straight years - PASS
  4. Earnings Growth - Earnings per share has increased by at least 1/3rd over the last 10 years using 3-year averages at the beginning and end of the period - PASS
  5. Moderate PEmg (price over normalized earnings) ratio - PEmg is less than 20 - PASS
  6. 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

  1. Earnings Stability - Positive earnings per share for at least 5 years - PASS
  2. Dividend Record - Currently pays a dividend - PASS
  3. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $87.88
MG Value $147.72
MG Opinion Undervalued
Value Based on 3% Growth $67.74
Value Based on 0% Growth $39.71
Market Implied Growth Rate 5.15%
PEmg 18.81
PB Ratio 4.65

Balance Sheet - June 2014

Total Debt $55,000,000,000
Total Assets $152,000,000,000
Intangible Assets $0
Total Liabilities $132,000,000,000
Outstanding Shares 1,058,000,000

Earnings Per Share

2014 (estimate) $5.46
2013 $4.88
2012 $3.89
2011 $4.12
2010 $3.35
2009 $1.54
2008 $2.32
2007 $3.36
2006 $2.99
2005 $2.97
2004 $2.68

Earnings Per Share - ModernGraham

2014 (estimate) $4.67
2013 $4.04
2012 $3.43
2011 $3.11
2010 $2.64
2009 $2.40

Dividend History

AXP Dividend Chart

AXP Dividend data by YCharts

Conclusion:

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.

This article was written by

Benjamin Clark profile picture
5.71K Followers
Benjamin is one of TipRank's top bloggers.  He is the founder of ModernGraham.com, a value investing website devoted to the study and modernization of the teachings of Benjamin Graham.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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