American Express (NYSE:AXP)
Currently, February 10, 2011, AXP is trading at $45.72, down 7% from its 52-week high of $49.19. The stock pays a $0.72 dividend and is yielding 1.6%, highest among its competitors. American Express has a low P/E ratio of 13.7 compared with Visa’s 15.3, MasterCard’s 17.8, and the industrial average of 24.1. This low P/E ratio signals an undervaluation. Earnings are up 116% from 2009 to 2010 with net income up 89.8%. The total revenue increased in the first quarter of 2011 by 13% over the fourth quarter of 2010. Sales growth is up 13.4% versus 16.7% for Visa, and 8.63% for MasterCard. American Express has returned 6.5% year to date while the S&P 500 has returned 5%. Standard and Poor’s have recommended AXP as a buy with a price target of $52, 13% over the current price.
As of October 10th, 2010 American Express has been involved with a lawsuit filed by the Justice Department against their merchant fee practices. The antitrust litigation included Visa and MasterCard; however, both these companies settled outside of court. American Express issued a statement declaring the Justice Department’s requirements contained in the lawsuit, for credit card companies, will be overly restrictive and distort the competitive process, so they will not settle. The lawsuit is still pending, and because of this unknown, many buyers are off the table. AXP’s stock price is depressed as a result of this litigation, but the overall affect that this lawsuit might have on the company is minimal due to their diversification of revenue. In addition, it is evident by the growth of Visa and MasterCard that, in the event of a loss in the case, there will be no significant impact on American Express’s future growth. Another issue facing this company is the expansion of premier credit services by Visa and other card companies that once differentiated American Express. In response to this action, AXP has taking direct steps to reinforce the company’s core business and its image, resulting in an increase of expenses by 17% for the first quarter. Yet, they are streamlining their operations with the reduction of 550 positions in the U.S. and the transferring of operations to the U.K. and Japan.
Even though there are a few obstacles ahead of American Express, the solid financials and the current growth trend make this stock a “buy”. The technical analysis of this stock by Standard and Poor’s also gives it a bullish forecast, which further adds to my recommendation. We believe, as the economy improves and more people spend, the financial services industry will be one of the first industries to reap the profits, with American Express poised to take a considerable share. Future prospects, good fundamentals, and a nice dividend make American Express a strong long position.