AXP: YOU STILL SHOULDN'T LEAVE HOME WITHOUT IT
Still, AmEx faces pressure on whether or not the company's growth engine has run out. This mainly results from the lost of partnership with Costco which contributed to approximately 10% of AmEx's revenue and a strong dollar. CEO of AmEx Kenneth Chenault gave Costco the boot, ending their partnership when negotiating terms stating the deal didn't make "economic sense for us and our shareholder". The reasons weren't justified, however I trust that Chenault made the best decisions for the company and it's shareholders. Although AmEx's stock price suffered in the year of 2015, the volatility is temporary and the king credit card issuer will continue to deliver above industry average performance. It's better to exit a bad deal that could have been temporarily beneficial however long-term not so fruitful for the company. If you think of it this way, it will make more sense. One, it is much easier to get a credit card than most other loans. In addition, credit card loans are unsecured, which means if customers do not pay their balances back, the company has to write-off those bad debts, obviously resulting a loss for the company. Because AmEx's cardholders are much more affluent and spend more than cardholders of their competitors, they are able to charge merchants more for fees, which is why their EPS (Earnings Per Share) are higher. In addition, you can only get an AmEx card from AmEx, as oppose to Visa and MasterCard whose cards are issued by banks. This means that AmEx has more control over who they are lending to and most importantly could provide more customized rewards and better customer service. The company has a strong brand name, good marketing, and strong client base. Much like Warren Buffett said "it's a company that's used to adapting and will continue to do so in a competitive industry".
· AXP currently have $22.7B of cash and cash equivalent on hand with a market cap of $59.5B, compared with Visa market cap of $174.8B and MasterCard $107B
· On a multiple standpoint, AXP's P/E is 12, both Visa and MasterCard around 29, with the industry average at 17
· AXP's P/B ratio of 2.9 is analogous with the industry, with Visa at 5.9 and MasterCard at 17.8 - an inverse of these ratio results with AXP providing the most margin of safety.
· AXP provide a 1.9% dividend, with an industry average at 1%, Visa at 0.6% and MasterCard at 0.7% - with a lot of cash of hand there is room for dividends to grow as well as share buybacks
· The average US Consumer spends $13.6K, has an average FICO score of 764 and 64% are digitally active
· AXP's book value has grown 10.4%, Free Cash Flow (Net Operating Income minus Capital Expenditures) of 1.7% and earnings 6% at a CAGR (annualized rate) for the past 10 years
· However, AXP has a D/E ratio of 2.3, a bit higher with the industry average at 2 and substantially higher compared to both Visa and MasterCard at 0.5
This chart here is my discounted cash flow model/valuation on AXP. This valuation is based on conservative estimates. This means that if you buy AXP at its current trading price of $62.14 and average free cash flow of $7,985 (in millions) grows at an expected compounded annualized growth rate of 1.73% for the next 10 years, you should expect (not guaranteed) an annualized rate of return of 20.39% on your investment. Remember that ROE is Net Income/Avg Total Shareholders Equity. This means for every $1 you invest in AXP you can expect about $.20 cents back.
Disclosure: I am/we are long AXP.