American Express (AXP) Quarterly Valuation

moneyCompany Profile (obtained from Google Finance): American Express Company (American Express) is a global service company. The Company’s range of products and services includes Charge and credit card products, Expense management products and services, Consumer and business travel services, Stored value products, such as travelers cheques and other prepaid products, Network services, merchant acquisition and processing, servicing and settlement, and point-of-sale, marketing and information products and services for merchants, and fee services, including market and trend analyses and related consulting services, fraud prevention services, and the design of customized customer loyalty and rewards programs. It operates in four segments: U.S. Card Services, International Card Services, Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS). American Express and its principal operating subsidiary, American Express Travel Related Services Company, Inc. (TRS), are bank holding companies.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 4/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  5. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $115.45
MG Opinion Fairly Valued
Value Based on 3% Growth $58.65
Value Based on 0% Growth $34.38
Market Implied Growth Rate 7.02%
PEmg 22.53
PB Ratio 5.08

Balance Sheet – 9/30/2013 

Total Debt $52,529,000,000
Total Assets $150,103,000,000
Intangible Assets $0
Total Liabilities $130,887,000,000
Outstanding Shares 1,071,000,000

Earnings Per Share

2013 $4.92
2012 $3.89
2011 $4.09
2010 $3.35
2009 $1.54
2008 $2.48
2007 $3.39
2006 $3.01
2005 $2.56
2004 $2.74
2003 $2.31

Earnings Per Share – ModernGraham 

2013 $4.04
2012 $3.43
2011 $3.12
2010 $2.68
2009 $2.42
2008 $2.86

Conclusion:

Since I rated American Express as undervalued last October, it has risen over 13% to now priced by the market within the margin of safety.  The company is suitable for the Enterprising Investor but not the Defensive Investor, because it currently trades at high PEmg and PB ratios.  As a result, Enterprising Investors wishing to follow Benjamin Graham’s methods should feel comfortable proceeding with further research to determine if American Express would be good for their individual portfolio, beginning with a review of a competitor through looking at the ModernGraham valuation of Capital One Financial (COF).  As for a valuation, though the company missed most analyst’s forecasts for Q4 2013 earnings, it actually did better than the ModernGraham valuation model expected (I believe it is important to be very conservative when estimating future results, as it is better to have an estimate of intrinsic value which is too low than to have an estimate that is too high), and the valuation has improved slightly since the last review.  EPSmg (normalized earnings) grew from $2.42 in 2009 to $4.04 in 2013, a level of growth that supports the market’s implied estimate of 7.02%, and the company currently appears to be fairly valued.

What do you think?  What value would you put on American Express (AXP)?  Is the company suitable only for Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out the new issue of ModernGraham Stocks & Screens, which was released this week?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in American Express (AXP) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill


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Comments

2 responses to “American Express (AXP) Quarterly Valuation”

  1. James Burns Avatar
    James Burns

    Graham specified a dividend rate of 4% minimum. Most of your defensive rating would fail this criteria. What’s your Modern view?

    1. Benjamin Clark Avatar

      James – Thanks for the comment. What is your source for the 4% minimum? My thought is that Graham placed a greater emphasis on consistent dividend payments over a length of time. For example, he suggested requiring uninterrupted dividend payments for at least 20 years (see Chapter 14) for the Defensive Investor. The greater the consistency in the company, the more reliable the assumption that it will continue to operate similarly in the future.

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