Valuation: American Express Company (AXP)

Over the next few weeks, I hope to do an individual valuation of each of the components of the Dow Jones Industrial Average.  For a brief overview of the Dow, please see our Glance at the Dow - a snapshot of the valuations on March 10.  When I have completed the individual valuations, I will put together another overview. 

Company Profile:  American Express Company (AXP) (obtained via Google Finance)

American Express Company (American Express) is a global payments and travel company. The Company’s principal products and services are charge and credit payment card products, and travel-related services offered to consumers and businesses around the world. During the year ended December 31, 2007, the Company realigned its reportable operating segments into two: the Global Consumer Group and the Global Business-to-Business Group. Accordingly, U.S. Card Services and International Card Services were aligned within the Global Consumer Group, and Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS) were aligned within the Global Business-to-Business Group. In February 2008, the Company announced that it has completed the sale of its international banking subsidiary, American Express Bank Ltd. (AEB), to Standard Chartered PLC.

 Business and Management Review 

1) Is the business simple and understandable?

American Express is essentially in the banking industry.  The company focuses on helping traveler’s while they are away from their home banks.  This involves credit card processing, traveler’s checks, etc.  The business plan itself is fairly simple.

 2) Does the business have a consistent operating history?

Originally American Express was a shipping and delivering company.  Long ago when the US Postal Service was still being established, AXP was founded to help deliver goods.  After a time, the company was one of the best in the business.  Since the main customers were banks, the management slowly transitioned the company to tailor more to the banks.  The company began introducing products specific to banks (such as money orders in 1882), and began closing its delivery businesses.  Since then, the company has remained true to its strategy of creating and selling financial products.  Financially, the company has paid a dividend and had a positive net income for more than 10 years.

 3) Does the business have favorable long term prospects?It is easy to reason that AXP will have a prominent role in the future economy.  As travel becomes easier and more popular, some of the products may be used more.  However, the company also faces significant competition from the major banks and credit card companies.  To a lesser extent, AXP may be threatened by the emerging technologies of the web and businesses such as Paypal. 4) Is management rational?

Kenneth Chenault is the Chairman and CEO of American Express Company, a role he has held since April 2001.  Over that time, the company has grown its revenues, and it appears he has a rational approach to the company’s future.  However, it is the view of the writer that Mr. Chenault’s salary may be a little high.

 5) Is management candid with its shareholders?

The company has the standard investor relations page, with earnings reports, webcasts, etc.  However, we would like to see more information about the management of the company.

  Financial and Value Review 

Defensive:

1) Size of firm

The market cap of American Express Company is $56.59 billion.  Pass.

 2) Strong financial condition

The company’s current ratio (actually we used the total assets and total liabilities instead since this is a financial institution and does not easily lend itself to current ratio use) is about 1.09, below the 2.0 requirement.  Fail.

 3) Earnings stability

The company has had a consistently positive net income for over 10 years.  Pass.

 4) Dividend record

AXP has consistently paid a dividend for over 10 years.  Pass.

 5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years.  Pass.

 6) Price to earnings analysis

With a PE ratio (using our Methods) of 17.44, the requirement of under 20 is met.   Pass.

 7) Price to assets analysis

The Price to Book ratio for AXP is 5.13, higher than our 2.5 limit.  The multiple of PE to PB is higher than our requirement of 50.  Fail.

 Overall

Having passed only 5 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we believe American Express Company would not be suitable for the defensive investor.

  Enterprising:

1) Strong financial condition

The company’s current ratio (see defensive investor section on current ratio) is below 1.5.  Fail.

 2) Earnings stability

The company has achieved a positive net income for over 5 years.  Pass.

 3) Dividend record

The company currently pays a dividend.  Pass.

 4) Earnings growth

Earnings are greater today than they were 5 years ago.  Pass.

5) Price

The price is not less than 150% of the net tangible assets.  Fail. 

Overall

Having passed only 3 of the required 5 tests for the enterprising investor, we feel that American Express Company would not be suitable for the enterprising investor following Benjamin Graham’s intelligent investor guidelines.

 Valuation:

Our valuation model finds a fair value to be around $88.  

Opinion:

Since the company is currently trading at about $49, we feel it is undervalued and may be a suitable investment for the defensive or enterprising investor.

 What is your opinion?  Do you agree or disagree?  How do you feel about American Express?  Please let us know by leaving a comment.None of the staff of ModernGraham.com held a position in AXP at the time of publication.  Also, please read our disclaimer and Our Methods.

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