American Express Company (NYSE:AXP) presents an intriguing investment possibility for value investors as the company has shown strong earnings growth in recent years. Benjamin Graham, the father of value investing, taught that looking at the price cannot be the sole factor in investment decisions as 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 an updated look at how the 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||$68.23|
|Value Based on 0% Growth||$40.00|
|Market Implied Growth Rate||4.75%|
Balance Sheet - December 2014
Earnings Per Share
Earnings Per Share - ModernGraham
American Express Company passes the initial requirements of the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the high PB ratio while the Enterprising Investor has no initial concerns. As a result, Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
When it comes to that valuation, it is critical to consider the company's earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $2.64 in 2010 to $4.71 for 2014. This is a very strong level of demonstrated growth, which is well above the market's implied estimate for earnings growth of only 4.75% over the next 7-10 years. In fact, the historical growth is around 15.66% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, and therefore returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.
Be sure to check out previous ModernGraham valuations of American Express Company for a greater perspective!
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