American Express AXP
May 11, 2015 - 10:20am EST by
Mustang
2015 2016
Price: 79.50 EPS 5.84 0
Shares Out. (in M): 1,016 P/E 13.5 0
Market Cap (in M): 80,772 P/FCF 0 0
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT 0 0

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  • Banks
  • Financial services
  • Consumer Finance
  • credit card
  • Travel
 

Description

Introduction:

I believe that at its current price, American Express represents a compelling opportunity to own a high quality Company with a wide moat trading at an attractive valuation.  Further, management returns a sizable portion of cash to shareholders and has demonstrated strong capital allocation discipline.  The stock is currently at $79.50 per share compared to its 52 week low of $76.53 due to the loss of an important co-branded card relationships with CostCo and Jet Blue and recent legal loss (under appeal) that would give merchants the ability to charge less to customers paying with a competitors’ card, which typically have lower merchant fees.  I believe the market is overreacting and like the opportunity to buy a great company at a 14x P/E (well below the market multiple of 21x).  I believe this is a case where the market is overly focused on growth, and not on the high quality of the business and capital allocation discipline that management has shown (both by rejecting business that can’t earn its cost of capital and returning excess capital to shareholders).

Business Overview:

American Express (“AXP” or the “Company”) is one of four major credit card companies.  The Company primarily operates as a charge card company where customers are required to pay their balances each month.  The Company has 16% market share making it second only to Visa.  The Company’s market share has remained steady over time.  The Company’s cardholders spend over 3x the average of a typical credit card holder.    

The Company generates most of its revenue from credit card fees paid by merchants for accepting AmEx.  The Company also generates revenue from interest on card holder balances and fees paid for having the card by customers.  Its primary expenses relate to marketing and rewards.  The Company charges merchants a higher rate than most of its competitors for using the card, but then passes much of that on the customer in the form of better rewards.  This has led to AmEx being used by the more affluent who are using the cards for the rewards instead of for the extension of credit.  This creates a virtuous circle where the most affluent customers are attracted to AmEx, enabling it to spend less money on charge-offs, collections efforts, etc. and spend more money on rewards, which then attracts more affluent customers. 

 

American Express              
Income Statement              
($ in millions)              
  Fiscal Year Ending December 31, LTM
  2009 2010 2011 2012 2013 2014 3/31/2015
Discount Revenue $13,202 $14,880 $16,734 $17,739 $18,695 $19,493 $19,533
Net Card Fees 2,151 2,102 2,448 2,506 2,631 2,712 2,705
Travel Commissions and Fees 1,591 1,773 1,971 1,940 1,913 1,118 784
Other Commissions and Fees 1,778 2,031 2,269 2,317 2,414 2,508 2,509
Other 2,490 1,927 2,164 2,425 2,274 2,989 2,956
Non-Interest Revenue $21,212 $22,713 $25,586 $26,927 $27,927 $28,820 $28,487
               
Interest of Loans 4,468 6,783 6,272 6,511 6,718 6,929 7,013
Interest and dividends on investments 804 443 327 246 201 179 174
Interest on deposits 59 66 97 97 86 71 73
Total Interest Income $5,331 $7,292 $6,696 $6,854 $7,005 $7,179 $7,260
               
Total Revenue $26,543 $30,005 $32,282 $33,781 $34,932 $35,999 $35,747
               
Interest Expense 2,207 2,423 2,320 2,226 1,958 1,707 1,678
               
Charge Card Provisions 857 595 770 742 789 792 751
Loan Provisions 4,266 1,527 253 1,149 1,229 1,138 1,123
Other Provisions 190 85 89 99 92 114 105
Provisions for Losses 5,313 2,207 1,112 1,990 2,110 2,044 $1,979
               
Marketing, Promotions, and Rewards 6,563 8,738 9,930 9,944 10,267 11,073 11,192
Salaries and Emplyee Benefits 5,080 5,566 6,252 6,597 6,191 6,095 5,860
Other 4,539 5,107 5,712 6,573 6,518 6,089 5,939
               
Total Operating Expenses 23,702 24,041 25,326 27,330 27,044 27,008 26,648
               
Pre-Tax Income $2,841 $5,964 $6,956 $6,451 $7,888 $8,991 $9,099
Income Tax 704 1,907 2,057 1,969 2,529 3,106 3,121
Net Income $2,137 $4,057 $4,899 $4,482 $5,359 $5,885 $5,978
               
EPS $1.54 $3.37 $4.09 $3.89 $4.88 $5.58 $5.84
Shares 1,388 1,204 1,198 1,152 1,098 1,055 1,023
% Change   -13.2% -0.5% -3.8% -4.7% -4.0% -3.0%
               
Growth:              
Discount Revenue   12.7% 12.5% 6.0% 5.4% 4.3% 0.9%
Net Card Fees   -2.3% 16.5% 2.4% 5.0% 3.1% -1.0%
Travel Commissions and Fees   11.4% 11.2% -1.6% -1.4% -41.6% -79.0%
Other Commissions and Fees   14.2% 11.7% 2.1% 4.2% 3.9% 0.2%
Other   -22.6% 12.3% 12.1% -6.2% 31.4% -6.6%
Non-Interest Revenue   7.1% 12.6% 5.2% 3.7% 3.2% -4.9%
               
Interest Earned on Loans / Loans 13.4% 11.1% 9.9% 9.9% 9.9% 9.9% 10.5%
Interest Expense / Debt & Deposits 2.7% 2.4% 2.3% 2.2% 1.9% 1.6% 1.6%
Spread 10.7% 8.6% 7.6% 7.7% 8.0% 8.3% 8.8%
American Express              
Balance Sheet              
($ in millions)              
  Fiscal Year Ending December 31, Q1
  2009 2010 2011 2012 2013 2014 2015
Cash & Investments $39,879 $30,366 $32,040 $27,864 $24,502 $26,000 $28,000
               
Gross Card Member Receivables 38,859 40,995 44,547 46,342 47,571 47,000 46,000
Reserve 655 561 438 428 386 0 0
Net Card Member Receivables 38,204 40,434 44,109 45,914 47,185 47,000 46,000
               
Gross Card Member Loans 33,305 61,286 63,058 65,780 67,846 70,000 67,000
Reserve 3,295 3,670 1,892 1,471 1,261 0 0
Net Card Member Loans 30,010 57,616 61,166 64,309 66,585 70,000 67,000
               
PP&E 2,782 2,905 3,367 3,635 3,875 3,875 0
Other Assets 13,213 15,368 12,655 11,418 11,228 12,125 14,000
Total Assets $124,088 $146,689 $153,337 $153,140 $153,375 $159,000 $155,000
               
Customer Deposits $26,289 $29,727 $37,898 $39,803 $41,763 $44,000 $45,000
Travelers Cheques 5,975 5,618 5,123 4,601 4,240 0  
AP 8,926 9,691 10,458 10,006 10,615    
Debt 54,682 69,830 62,994 62,287 60,351 61,000 57,000
Other Liabilities 13,810 15,593 18,070 17,557 16,910 33,000 31,000
Total Liabilities $109,682 $130,459 $134,543 $134,254 $133,879 $138,000 $133,000
Shareholders' Equity 14,406 16,230 18,794 18,886 19,496 21,000 22,000
Total Liabilities + Equity $124,088 $146,689 $153,337 $153,140 $153,375 $159,000 $155,000
               
Check $0 $0 $0 $0 $0 $0 $0
               
Equity / Assets 11.6% 11.1% 12.3% 12.3% 12.7% 13.2% 14.2%

The Company’s primary assets are cardholder receivables, which are funded through deposits from its bank customers and publicly traded debt.  The mix of bank deposits has been increasing over time.  The fact that the Company is a well-capitalized bank puts it in a much better position to weather a financial market crisis than during the last crisis. 

 

The Global payment industry has been growing at a 7% CAGR over the past five years, and should structurally grow due to increased consumer spending over time.  Analysts are expecting it to grow 8% through 2020. 

The Company’s stock price has declined recently, because it lost an important co-branded card relationship with Costco when it refused a deal below its cost of capital.  The loss of this relationship will mean that AmEx is unlikely to grow over the next couple of years.  However, I believe you aren’t paying for much growth at the current price.  Further, there are concerns with a recent court ruling that says that merchants can offer a discount to customers paying with Visa or another card (currently Merchants can already offer discounts for cash).  It is unlikely merchants will do so, because the price difference is so small (as high as 2%), and runs the risk of alienating their most affluent, highest spending customers.  AmEx customers spend over 3x more on average than comparable credit card customers.

Management:

The Company is run by Kenneth Chenault who owns ~$75mm of stock or ~40x his base salary.    

Management has done an excellent job of returning capital to shareholders, returning ~75% of cash flow to shareholders over the past 3 years.

Risks:

1.      Merchant’s Steer Customers to Other Cards Due to Court Ruling:  See discussion above.

2.      Leverage:  The Company is currently levered and is a bank. Small changes in asset value can greatly impact equity.  I gain comfort with this because the Company could withstand a financial crisis type shock and still be well capitalized.

 

3.      Disruption:  If Paypal and others become more acceptable forms of payment they may take share from AmEx.  I gain comfort given Amex’s model of focusing on more affluent customers using the card for rewards points, not just a payment mechanism.  Further, AmEx has a history of innovation, and has been a very difficult business to kill over its 165 year history.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Company begins to grow again in 2017 causing multiple expansion.  

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    Description

    Introduction:

    I believe that at its current price, American Express represents a compelling opportunity to own a high quality Company with a wide moat trading at an attractive valuation.  Further, management returns a sizable portion of cash to shareholders and has demonstrated strong capital allocation discipline.  The stock is currently at $79.50 per share compared to its 52 week low of $76.53 due to the loss of an important co-branded card relationships with CostCo and Jet Blue and recent legal loss (under appeal) that would give merchants the ability to charge less to customers paying with a competitors’ card, which typically have lower merchant fees.  I believe the market is overreacting and like the opportunity to buy a great company at a 14x P/E (well below the market multiple of 21x).  I believe this is a case where the market is overly focused on growth, and not on the high quality of the business and capital allocation discipline that management has shown (both by rejecting business that can’t earn its cost of capital and returning excess capital to shareholders).

    Business Overview:

    American Express (“AXP” or the “Company”) is one of four major credit card companies.  The Company primarily operates as a charge card company where customers are required to pay their balances each month.  The Company has 16% market share making it second only to Visa.  The Company’s market share has remained steady over time.  The Company’s cardholders spend over 3x the average of a typical credit card holder.    

    The Company generates most of its revenue from credit card fees paid by merchants for accepting AmEx.  The Company also generates revenue from interest on card holder balances and fees paid for having the card by customers.  Its primary expenses relate to marketing and rewards.  The Company charges merchants a higher rate than most of its competitors for using the card, but then passes much of that on the customer in the form of better rewards.  This has led to AmEx being used by the more affluent who are using the cards for the rewards instead of for the extension of credit.  This creates a virtuous circle where the most affluent customers are attracted to AmEx, enabling it to spend less money on charge-offs, collections efforts, etc. and spend more money on rewards, which then attracts more affluent customers. 

     

    American Express              
    Income Statement              
    ($ in millions)              
      Fiscal Year Ending December 31, LTM
      2009 2010 2011 2012 2013 2014 3/31/2015
    Discount Revenue $13,202 $14,880 $16,734 $17,739 $18,695 $19,493 $19,533
    Net Card Fees 2,151 2,102 2,448 2,506 2,631 2,712 2,705
    Travel Commissions and Fees 1,591 1,773 1,971 1,940 1,913 1,118 784
    Other Commissions and Fees 1,778 2,031 2,269 2,317 2,414 2,508 2,509
    Other 2,490 1,927 2,164 2,425 2,274 2,989 2,956
    Non-Interest Revenue $21,212 $22,713 $25,586 $26,927 $27,927 $28,820 $28,487
                   
    Interest of Loans 4,468 6,783 6,272 6,511 6,718 6,929 7,013
    Interest and dividends on investments 804 443 327 246 201 179 174
    Interest on deposits 59 66 97 97 86 71 73
    Total Interest Income $5,331 $7,292 $6,696 $6,854 $7,005 $7,179 $7,260
                   
    Total Revenue $26,543 $30,005 $32,282 $33,781 $34,932 $35,999 $35,747
                   
    Interest Expense 2,207 2,423 2,320 2,226 1,958 1,707 1,678
                   
    Charge Card Provisions 857 595 770 742 789 792 751
    Loan Provisions 4,266 1,527 253 1,149 1,229 1,138 1,123
    Other Provisions 190 85 89 99 92 114 105
    Provisions for Losses 5,313 2,207 1,112 1,990 2,110 2,044 $1,979
                   
    Marketing, Promotions, and Rewards 6,563 8,738 9,930 9,944 10,267 11,073 11,192
    Salaries and Emplyee Benefits 5,080 5,566 6,252 6,597 6,191 6,095 5,860
    Other 4,539 5,107 5,712 6,573 6,518 6,089 5,939
                   
    Total Operating Expenses 23,702 24,041 25,326 27,330 27,044 27,008 26,648
                   
    Pre-Tax Income $2,841 $5,964 $6,956 $6,451 $7,888 $8,991 $9,099
    Income Tax 704 1,907 2,057 1,969 2,529 3,106 3,121
    Net Income $2,137 $4,057 $4,899 $4,482 $5,359 $5,885 $5,978
                   
    EPS $1.54 $3.37 $4.09 $3.89 $4.88 $5.58 $5.84
    Shares 1,388 1,204 1,198 1,152 1,098 1,055 1,023
    % Change   -13.2% -0.5% -3.8% -4.7% -4.0% -3.0%
                   
    Growth:              
    Discount Revenue   12.7% 12.5% 6.0% 5.4% 4.3% 0.9%
    Net Card Fees   -2.3% 16.5% 2.4% 5.0% 3.1% -1.0%
    Travel Commissions and Fees   11.4% 11.2% -1.6% -1.4% -41.6% -79.0%
    Other Commissions and Fees   14.2% 11.7% 2.1% 4.2% 3.9% 0.2%
    Other   -22.6% 12.3% 12.1% -6.2% 31.4% -6.6%
    Non-Interest Revenue   7.1% 12.6% 5.2% 3.7% 3.2% -4.9%
                   
    Interest Earned on Loans / Loans 13.4% 11.1% 9.9% 9.9% 9.9% 9.9% 10.5%
    Interest Expense / Debt & Deposits 2.7% 2.4% 2.3% 2.2% 1.9% 1.6% 1.6%
    Spread 10.7% 8.6% 7.6% 7.7% 8.0% 8.3% 8.8%
    American Express              
    Balance Sheet              
    ($ in millions)              
      Fiscal Year Ending December 31, Q1
      2009 2010 2011 2012 2013 2014 2015
    Cash & Investments $39,879 $30,366 $32,040 $27,864 $24,502 $26,000 $28,000
                   
    Gross Card Member Receivables 38,859 40,995 44,547 46,342 47,571 47,000 46,000
    Reserve 655 561 438 428 386 0 0
    Net Card Member Receivables 38,204 40,434 44,109 45,914 47,185 47,000 46,000
                   
    Gross Card Member Loans 33,305 61,286 63,058 65,780 67,846 70,000 67,000
    Reserve 3,295 3,670 1,892 1,471 1,261 0 0
    Net Card Member Loans 30,010 57,616 61,166 64,309 66,585 70,000 67,000
                   
    PP&E 2,782 2,905 3,367 3,635 3,875 3,875 0
    Other Assets 13,213 15,368 12,655 11,418 11,228 12,125 14,000
    Total Assets $124,088 $146,689 $153,337 $153,140 $153,375 $159,000 $155,000
                   
    Customer Deposits $26,289 $29,727 $37,898 $39,803 $41,763 $44,000 $45,000
    Travelers Cheques 5,975 5,618 5,123 4,601 4,240 0  
    AP 8,926 9,691 10,458 10,006 10,615    
    Debt 54,682 69,830 62,994 62,287 60,351 61,000 57,000
    Other Liabilities 13,810 15,593 18,070 17,557 16,910 33,000 31,000
    Total Liabilities $109,682 $130,459 $134,543 $134,254 $133,879 $138,000 $133,000
    Shareholders' Equity 14,406 16,230 18,794 18,886 19,496 21,000 22,000
    Total Liabilities + Equity $124,088 $146,689 $153,337 $153,140 $153,375 $159,000 $155,000
                   
    Check $0 $0 $0 $0 $0 $0 $0
                   
    Equity / Assets 11.6% 11.1% 12.3% 12.3% 12.7% 13.2% 14.2%

    The Company’s primary assets are cardholder receivables, which are funded through deposits from its bank customers and publicly traded debt.  The mix of bank deposits has been increasing over time.  The fact that the Company is a well-capitalized bank puts it in a much better position to weather a financial market crisis than during the last crisis. 

     

    The Global payment industry has been growing at a 7% CAGR over the past five years, and should structurally grow due to increased consumer spending over time.  Analysts are expecting it to grow 8% through 2020. 

    The Company’s stock price has declined recently, because it lost an important co-branded card relationship with Costco when it refused a deal below its cost of capital.  The loss of this relationship will mean that AmEx is unlikely to grow over the next couple of years.  However, I believe you aren’t paying for much growth at the current price.  Further, there are concerns with a recent court ruling that says that merchants can offer a discount to customers paying with Visa or another card (currently Merchants can already offer discounts for cash).  It is unlikely merchants will do so, because the price difference is so small (as high as 2%), and runs the risk of alienating their most affluent, highest spending customers.  AmEx customers spend over 3x more on average than comparable credit card customers.

    Management:

    The Company is run by Kenneth Chenault who owns ~$75mm of stock or ~40x his base salary.    

    Management has done an excellent job of returning capital to shareholders, returning ~75% of cash flow to shareholders over the past 3 years.

    Risks:

    1.      Merchant’s Steer Customers to Other Cards Due to Court Ruling:  See discussion above.

    2.      Leverage:  The Company is currently levered and is a bank. Small changes in asset value can greatly impact equity.  I gain comfort with this because the Company could withstand a financial crisis type shock and still be well capitalized.

     

    3.      Disruption:  If Paypal and others become more acceptable forms of payment they may take share from AmEx.  I gain comfort given Amex’s model of focusing on more affluent customers using the card for rewards points, not just a payment mechanism.  Further, AmEx has a history of innovation, and has been a very difficult business to kill over its 165 year history.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Company begins to grow again in 2017 causing multiple expansion.  

    Messages


    SubjectRe: Re: ValueAct
    Entry12/18/2015 01:27 PM
    Memberspike945

    i think an analyst said the same thing recently regarding DFS but then dismissed it!  


    SubjectRe: Re: Re: Re: ValueAct
    Entry12/18/2015 05:57 PM
    Memberspike945

    wasn't it just re-done recently?  not sure if there is a CIC clause in their somewhere.

    from anecdotal info - the Starwood deal has very loyal following of relatively high charging customers.  losing it would be bad.

    AXP seems to be getting hit on all sides.


    SubjectPricing pressure
    Entry01/06/2016 09:49 AM
    Memberavahaz

    Mustang,

    How has Amex' pricing eveloved relative to competitors in recent years/quarters and how wide is the gap currenlty? I guess one needs to look at both the MDR to compare the cost to the merchant for accepting AMEX vs V/MA and the network and acquirer fee AMEX charges its issuing partners?

    The loss of the fidelity contract seems to imply that competitors are agressively pursuing Amex partners with lower pricing so the question is how much pricing pressure might AXP have to endure in order to maintain its partners?

     

    Thanks

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