Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. 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 or by reviewing the 10 Undervalued Stocks for the Enterprising Investor – August 2017. 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 stock analysis showing a specific look at how American Express Co. (AXP) fares in the ModernGraham valuation model.
Company Profile (obtained from Marketwatch): American Express Co. operates as a global services company, which engages in the provision of credit card, financial, and global travel services. It operates through the following business segments: U.S. Card Services, International Card Services, Global Commercial Services, Global Network & Merchant Services, and Corporate & Other. The USCS segment offers products and services to consumers and small businesses in the United States and provides travel services to card members and other customers. The ICS segment provides proprietary consumer and small business cards outside the United States. The GCS segment includes global corporate payment services to large and mid-sized companies. The GNMS segment operates a global payments network that processes and settles proprietary and non-proprietary card transactions. It also provides point-of-sale products, multi-channel marketing programs and capabilities, services and data, leveraging the global closed-loop network. The Corporate & Other segment includes corporate functions and certain other businesses including the company’s enterprise growth business and other company operations. The company was founded by Henry Wells, William G. Fargo and John Warren Butterfield on March 28, 1850 and is headquartered in New York, NY.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass all 6 of the following tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$84,456,033,395||Pass|
|2. Earnings Stability||Positive EPS for 10 years prior||Pass|
|3. Dividend Record||Dividend Payments for 10 years prior||Pass|
|4. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||66.48%||Pass|
|5. Moderate PEmg Ratio||PEmg < 20||19.11||Pass|
|6. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||4.63||Fail|
|Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.|
|1. Earnings Stability||Positive EPS for 5 years prior||Pass|
|2. Dividend Record||Currently Pays Dividend||Pass|
|3. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||1.23%|
|MG Value based on 3% Growth||$73.84|
|MG Value based on 0% Growth||$43.29|
|Market Implied Growth Rate||5.30%|
|% of Intrinsic Value||174.17%|
American Express Company is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the high PB ratio. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $4.71 in 2014 to an estimated $5.09 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.3% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into American Express Company revealed the company was trading above its Graham Number of $55.19. The company pays a dividend of $1.34 per share, for a yield of 1.4% Its PEmg (price over earnings per share – ModernGraham) was 19.11, which was below the industry average of 21.55, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
American Express Company receives an average overall rating in the ModernGraham grading system, scoring a C.
Stage 3: Information for Further Research
|Number of Consecutive Years of Dividend Growth||2|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2017|
|Long-Term Debt & Capital Lease Obligation||$55,804,000,000|
|Shares Outstanding (Diluted Average)||868,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$6.38|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.09|
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.