A Rare Opportunity To Buy AmEx On The Cheap

Todd Kenyon, CFA profile picture
Todd Kenyon, CFA
212 Followers

I have owned and followed American Express (NYSE:AXP) for many years. In that time, I think the only time I purchased it this century was just after 9-11-01. It is rarely cheap, because it is a great business and a great franchise and everyone knows it. You need some serious fear to get this company on the cheap. 9-11 provided one such opportunity, when it plunged for a very short time to $24.20 per share.

I thought Thursday morning was a great opportunity when AXP dropped on Capital One's announcement. Remember that COF has a banking arm and is directly exposed to the mortgage mess. It also has a much less affluent client base than AXP, lower average FICO scores, and its balances revolve, whereas most of AXP's balances require monthly payment. In other words, AXP has a "spend-centric" model where they earn the majority of their revenue from the so-called discount fees earned each time a customer buys something with their card. Loan interest is a secondary revenue stream.

So I bought some AXP for some managed portfolios, and watched the stock climb the rest of the day. Then the 4pm press release hit that indicated AXP expected a weaker 2008 due to reduced consumer spending and more write offs. Great timing on my part, but in a few years or less it won't matter much in my opinion. I bought some more Friday morning as the market knocked another 10% off the stock, even though AXP still sees double digit topline growth in '08.

Let's compare AXP's current valuation to that immediately after 9-11. A major concern then was that AXP was leveraged to the travel industry, but it is far less so today. AXP had earned about $2 the year before, and earned about $2 the year after. So it bottomed at a little over 12-13x earnings. Today, at $44, and assuming '07 earnings of about $3.40 and '08 earnings of $3.50 or a bit more (earnings comparisons in '08 are affected by some one-time items in '07, so growth looks lower than it is), it valuation right back at post 9-11, sub-13x levels.

AXP is a fantastic worldwide franchise that would be impossible to replicate. It will benefit from increasing global affluence. It has growth prospects and returns on equity far better than the market. I think this one should be bought and put away for the long term. As usual, it could go lower in the near term, but for longer term investors, it is a rare opportunity indeed.

One final point: You don't have to take my word for it. Just look at who holds AXP in their portfolios - it is a veritable rogue's gallery of the best investors on the planet: Buffett, Greenblat, Davis, Eveillard, Olstein, Ruane Cuniff, Dodge & Cox, Gayner. Joel Greenblat, arguably one the finest value investors ever whose hedge fund has averaged 40% annually for more than 20 years (achieved not with smoke and mirrors, but with good old fashioned stock picking), and author of the must-read "The Little Book That Beats the Market", had 16%(!) of his multi-billion dollar portfolio invested in AXP as of his September filing. So - who to side with here - a bunch of scared sheep (the market) or the best investors of all time?

Tough choice...

Disclosure: Author is long AXP

This article was written by

Todd Kenyon, CFA profile picture
212 Followers
Todd Kenyon PhD CFA has been working as an analyst and portfolio manager for nearly 20 years, and currently presides over a long-only asset management firm, which he founded in 2006. He specializes in uncovering value and exploiting behavioral inefficiencies in the market, typically with a long-term perspective. He previously served nine years as portfolio manager and equity analyst for a boutique firm with over $700 million under management, $150M of which Todd managed. He received his CFA charter in 2001. Todd has a doctorate and a master's degree in marine biology from the University of Miami, and received his bachelor's degree with a double major in mechanical engineering and biology from Bucknell University.

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