Plenty Of Reasons To Buy Amex

11/4/2013


  Recent Price
$84
  Dividend
$0.92
  Yield
1.1%
  P/E Ratio
18
  Shares (millions)
1,081
  52-Week Price Range
$83.74 - $53.02

In each of the last 15 quarters, consumer-finance giant American Express ($84; AXP) has grown sales at least 3% and per-share operating profits at least 7%. Amex's consistency extends beyond sales and profits — the company's dividend payments rose throughout 2008 and 2009 despite the financial crisis — and has long supported a premium valuation. 

In the September quarter, Amex's 4% sales growth and per-share-profit growth of 15% topped consensus estimates. Amex bucked an industry trend in the quarter by widening its net interest margin, which drove a 9% gain in net interest income. Credit quality continued to improve, reaching what the company called "historically strong levels."

Amex's growth seems likely to continue. Wall Street projects per-share profits will increase 16% in the December quarter and 10% next year, with analyst targets on the rise. American Express is a Long-Term Buy.

What makes Amex different

Relative to other consumer-finance stocks, Amex isn't cheap. At 18 times trailing earnings, the stock trades roughly in line with the median for the broader diversified financial services group and 3% below its own five-year average price/earnings ratio. Amex does trade at a substantial discount to rivals MasterCard ($732; MA) and Visa ($204; V), though Amex's credit exposure and broader business model makes the transaction-processing companies imperfect comparables.

Merchant fees for card transactions accounted for 57% of Amex's revenue in the nine months ended September, with card fees providing another 8%. While Amex charges merchants higher rates than Visa and MasterCard, the premium has narrowed in recent years. Given that Amex cardmembers tend to earn higher credit ratings and spend more than Visa or MasterCard holders — the longtime justification for higher merchant rates — a narrowing spread between rates bodes well for future market-share gains.

Commissions and fees for travel and other products accounted for 13% of Amex's revenue in the nine-month period, and net interest income generated another 15%.

Three causes for optimism

We see plenty of reasons why American Express shares can outperform the market over the next two to four years. Here are three:

• After announcing in January plans to reduce staffing by at least 4%, Amex kept operating expenses in the first nine months of 2013 roughly flat with the year-earlier period. The company's newfound focus on expense control should keep profit margins fat.

• Amex spent a combined $6.86 billion on net share buybacks in 2011, 2012, and the first half of 2013, reducing the share count by 5% over the last year and 10% over the last three years. Buybacks should continue, as the Federal Reserve approved Amex's plan to repurchase $4.2 billion in stock in the year ending March 2014.

• The dividend rose 15% in April, and the stock now yields 1.1%. Amex has set a goal of returning 50% of its capital to shareholders via dividends and buybacks.

You can obtain an annual report for American Express Co. at 200 Vesey St., New York, NY 10285, (212) 640-2000, www.americanexpress.com.

AMERICAN EXPRESS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '13
1.25
vs.
1.09
4%
78.63
-
71.47
17 - 16
Jun '13
1.27
vs.
1.15
3%
78.61
-
63.43
18 - 14
Mar '13
1.15
vs.
1.07
3%
67.48
-
58.31
15 - 13
Dec '12
1.09
vs.
1.01
4%
59.40
-
53.02
14 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
33.81
4.40
0.78
61.42
-
47.40
14 - 11
2011
32.28
4.09
0.72
53.80
-
41.30
13 - 10
2010
30.24
3.35
0.72
49.19
-
36.60
15 - 11
2009
26.52
1.54
0.72
42.25
-
9.71
27 - 6
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
88
80
56
77
67
98
64

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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