ModernGraham Quarterly Valuation Of American Express Company

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Benjamin Clark
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Summary

  • AXP is suitable for the Enterprising Investor following the ModernGraham approach.
  • According to the ModernGraham valuation model, the company is undervalued at the present time.
  • The market is implying 4.75% 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) 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 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 - PASS
  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 1/3 over the last 10 years using 3-year averages at beginning and end of 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 $84.66
MG Value $150.56
MG Opinion Undervalued
Value Based on 3% Growth $68.23
Value Based on 0% Growth $40.00
Market Implied Growth Rate 4.75%
PEmg 17.99
PB Ratio 4.16

Balance Sheet - December 2014

Total Debt $58,000,000,000
Total Assets $159,000,000,000
Intangible Assets $0
Total Liabilities $138,000,000,000
Outstanding Shares 1,033,000,000

Earnings Per Share

2014 $5.56
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 $4.71
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:

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!

This article was written by

Benjamin Clark profile picture
5.72K 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.
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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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