Yeap, Amex is coming up on 35 years in the Dow. Will the next 35 years be another 25x investment?
Key Stats for American Express Company
| Ticker | AXP |
|---|---|
| Sector | Consumer Credit Cards Services |
| Latest price | $83.97 |
| Value | $75,051M |
| Daily vol | $282M |
| Date | 29 June 2017 |
| Links | Financials, americanexpress.com |
1. You know the brand, what about the company?
Amex's principal products and services are charge and credit card products, and travel-related services, which are offered to consumers and businesses around the world.
They break the business into:
- U.S. Consumer Services, i.e. folks in the US with an Amex card
- International Consumer and Network Services = foreigners
- Global Commercial Services = businessmen
- Global Merchant Services, shops and businesses paying Amex a cut
Next let's look at the splits.
| 2016 | Net Revenue | Income | Margin | No. of cards | Capital |
|---|---|---|---|---|---|
| US Consumers | $11.3bn | $2.5bn | 22% | 33m | $7.2bn |
| International | $5.2bn | $0.7bn | 13% | 15m | $2.5bn |
| Global Commercial | $9.2bn | $1.9bn | 21% | 14m | $7.0bn |
| Merchant Services | $4.4bn | $1.5bn | 33% | n/a | $2.5bn |
So clearly the least exciting bit is international. What's wrong with "American"! But maybe we shouldn't be so negative on the International unit, as to a large extent, Amex is outsourcing the international business with 150 partners do the card issuing to consumers and negotiations with shops in over 130 countries. i.e. they've only 15m Amex cards internationally but another 49m partner cards!
But overall the best margins and returns are from shops. It's no wonder lots of businesses refuse Amex.
Bringing it all together:
The top line is flatlining at best. And although the bottom line is looking good, that's driven by buybacks, not by operational efficiency. In fact, one-off gains have boosted earnings a lot in each of the last 3 years.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Revenue | $31bn | $33bn | $34bn | $33bn | $32bn |
| EPS | $3.89 | $4.88 | $5.56 | $5.05 | $5.65 |
Now, I'm all for capital coming back to shareholders, but I'd like to see some growth too. In the annual report they wrote:
In a challenging economic, competitive and regulatory environment, we remain focused on our key priorities of accelerating revenue growth, optimizing investments and resetting our cost base. In 2016, revenue was lower year-over-year, though revenue performance sequentially improved in the fourth quarter. We made a record level of business-building investments during 2016 and continued to make progress on our plans to remove $1 billion from our overall cost base by the end of 2017. In addition, we continued to leverage our strong capital position to return capital to shareholders through share repurchases and dividends.
Amex, please forgive me, but aren't you a mainly US business? Isn't the Great Recession nearly 7 years past?
2. Amex vs the rest
Visa and Mastercard really aren't fair comparisons, from a business model perspective, since they don't actually manage end consumers. They are more like the "Merchant Services" unit of Amex.. just 3 to 4 times bigger.
Maybe Paypal and Discovery ar worth a look, as they are brands in their own right, so on that front, we can probably cheer both margins and returns.
| Operations | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| American Express Company | $32,517M | 25% | 24% |
| Visa Inc | $16,829M | 68% | 17% |
| Mastercard Inc | $11,064M | 57% | 75% |
| Paypal Holdings Inc | $11,273M | 21% | 10% |
| Discover Financial Services | $8,810M | 53% | 22% |
| Fiserv Inc | $5,568M | 35% | 35% |
| Alliance Data Systems Corporation | $7,341M | 24% | 28% |
| Global Payments Inc | $3,870M | 21% | 12% |
| Square Inc | $1,791M | 0% | -17% |
But it's when we get to valuation that the difference come clear. AXP and DFS are expect to be single digit growers. And it's reflected in the price.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield |
|---|---|---|---|---|
| AXP | $75,051M | 15x | 8% | 2% |
| V | $221,874M | 29x | 15% | 1% |
| MA | $133,781M | 29x | 15% | 1% |
| PYPL.O | $65,336M | 31x | 17% | 0% |
| DFS | $23,526M | 10x | 9% | 2% |
| FISV.O | $26,348M | 24x | 12% | 0% |
| ADS | $14,621M | 14x | 12% | 1% |
| GPN | $14,010M | 23x | 18% | 0% |
| SQ | $9,091M | -128x | 20% | 0% |
Perhaps the assumption is that the "moats" around V MA and PYPL are significantly deeper. And that Amex's brand just isn't that defensible long term. An assumption, I'd argue with!
3. What does Wall Street thinks?
Although Wall Street says Buy it's hardly putting it's neck out with a $84 price target. i.e. no upside!
And at 15 times earnings, the stock's valuation has ramped to a two year high, all the way from just 9x earnings back in Feb 2016.
4. Clear your card?
When I read management transcripts, I don't get the impression that the Amex card is either in the soup or super. For example:
Step in back, over the past several years we have embarked on a serious of initiatives to reposition the company drive sustainable revenue growth. Those efforts which we covered in Investor Day, include, amongst others, focusing on further penetrating commercial payments by leveraging our small business and middle market assets on our global commercial segments, driving more organic growth through expanded engagement with existing customers, better leveraging our digital and big data capabilities for new customer acquisition and other targeting, growing our merchant network and pursuing lending expansion opportunities. These action for targeted to provide a mix of returns over the short, medium and longer-term.
It feels very "pedestrian". Sure, I'll get some cash back in divides and appreciation with buyback. But it's hard to get excited.
The card may be Platinum, but not the stock.
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author:
- u/shane_stockflare
- Shane Leonard, CFA
Submitted June 29, 2017 at 12:54PM by shane_stockflare http://ift.tt/2tp01nW
