In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period. Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation. We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before. By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment. In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how American Express (AXP) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): American Express Company (American Express) is a global service company. Its principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses worldwide. The Company operates in four segments: U.S. Card Services, International Card Services, Global Commercial Services (GCS) and Global Network & Merchant Services (GNMS). Corporate functions and auxiliary businesses, including the Company’s Enterprise Growth Group, publishing business and other company operations, are included in Corporate & Other. American Express and its principal operating subsidiary, American Express Travel Related Services Company, Inc. (TRS), are bank holding companies. During 2011, American Express completed the integration of Accertify Inc. Effective March 20, 2014, American Express Co acquired an undisclosed minority stake in Ezetap Mobile Solutions Pvt Ltd.
Defensive Investor – must pass all 6 of the following tests: Score = 4/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$67.15|
|Value Based on 0% Growth||$39.37|
|Market Implied Growth Rate||5.78%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
American Express Company is suitable for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the high PEmg and PB ratios, but the company passes all of the Enterprising Investor’s requirements. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Discover Financial Services (DFS) and ModernGraham’s valuation of Capital One Financial (COF). From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.68 in 2010 to an estimated $4.63 for 2014. This strong level of demonstrated growth outpaces the market’s implied estimate of 5.78% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the market price.
Be sure to check out the previous ModernGraham valuations of American Express (AXP) for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on American Express Company (AXP)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in American Express Company (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. Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.