American Express: Grows At 10%+ A Year, Until It Doesn't

Mar. 22, 2019 10:19 AM ETAmerican Express Company (AXP)13 Comments
Librarian Capital profile picture
Librarian Capital
7.77K Followers

Summary

  • AXP shares are near their 52-week high, and have attracted shareholders such as Berkshire Hathaway and Third Point.
  • EPS growth was in low teens in 2018 and can be again in 2019, but the business carries large long-term risks.
  • As AXP competes with large banks, it is vulnerable on the deteriorating economics of card member rewards and co-brand partners.
  • These had already caused AXP revenues and earnings to stagnate once in 2013-17, and may do so again.
  • At $110.77, AXP risk/reward seems finely balanced, and we recommend staying away from the stock.

Introduction

American Express (NYSE:AXP) shares have risen to near their 52-week high, after significantly underperforming credit card peers Visa (V) and Mastercard (MA), as well as the S&P 500 Index, over the last 5 years, as shown in the charts below. AXP has also attracted a number of high-profile investors: Third Point's Dan Loeb initiated a position in 18Q3, likely at a cost per share above $100, and announced a $135 target price for the following 18 months; Warren Buffett also retains a longstanding 17.9% stake, making AXP the 6th largest holding in the Berkshire Hathaway (BRK.A) portfolio as of 2018 year-end.

AXP Share Price (Last 12 Months)

Source: Bloomberg Markets (20-Mar-19).

AXP Share Perfomance vs. Visa, Mastercard and S&P 500 (Last 5 Years)

Source: Bloomberg Markets (20-Mar-19).

Management envisages that AXP will consistently achieve faster-than-industry revenue growth and operational leverage. Since 2018, this has translated into low-teens EPS growth – 13% actual in 2018, and 7-14% guided in 2019:

AXP EPS – 2018 Actual & 2019 Guidance

NB. 2018 EPS (diluted) was $7.33. Source: AXP investor day presentation (Mar-19).

Could AXP shares' recent strong performance be the start of a large multi-year bull run? This article reviews its business fundamentals to find out.

Company Overview

AXP operates a global integrated payment network for both consumers and enterprises, primarily with credit cards. Its "integrated" network means that, in most cases, AXP is responsible for all aspects of each transaction, including card issuance. This separates AXP from Visa and Mastercard, which operate their networks, but leave card issuance and payment processing to others.

85% of AXP's billed business comes from its proprietary cards (including cards co-branded with other companies, more below), the rest from network partners and licensees. 67% of AXP's net revenues (after provisions) are generated

This article was written by

Librarian Capital profile picture
7.77K Followers
Global, long-term, fundamentally-oriented & concentrated investing. With more than 10 years' buy-side experience, I look at stocks globally and across industries, with a focus on the U.S. and U.K.. My investing style can best be described as "Quality Growth" or "Growth At a Reasonable Price". (previously writing under the name "Blue Sky Capital" until December 2019)

Disclosure: I am/we are long AXP, BRK.B, JPM, MAR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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