Is American Express a Risky Investment?

With shares of American Express Company (NYSE:AXP) trading at around $67.75, is AXP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Who wants to read long paragraphs? Readers want facts. They want to get in and out as quickly as possible. At least in this case, your wish has been granted. Let’s take a look at some positives and negatives for American Express.

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Positives:

  • Best valuation compared to peers
  • 1.20 percent dividend yield (higher than peers)
  • Members are often big spenders
  • Analysts like the stock: 12 Buy, 12 Hold, 3 Sell
  • New buyback program
  • Global card spending increased 6 percent year-over-year
  • Stable delinquency rates
  • Lower salaries
  • Decreased benefit expenses
  • Decline in long-term debt to $56 billion from $59 billion
  • Consistent revenue improvements on an annual basis
  • Cash position increased to $28 billion from $22 billion
  • Dividend hike of 15 percent

Negatives:

  • Didn’t hold up as well as peers in 2008
  • Total expenses increased 1 percent year-over-year
  • Increase in tax rate to 33 percent from 29 percent
  • Earnings setback in 2012
  • ROE down to 23.3 percent from 27.1 percent
  • Debt management still needs improvement

The chart below compares fundamentals for American Express, Mastercard Incorporated (NYSE:MA), and Visa Inc. (NYSE:V). American Express has a market cap of $74.39 billion, Mastercard has a market cap of $65.72 billion, and Visa has a market cap of $110.61 billion.

AXP

MA

V

Trailing   P/E

17.10

24.40

46.52

Forward   P/E

12.88

17.72

19.67

Profit   Margin

15.12%

37.33%

22.46%

ROE

23.16%

43.07%

8.77%

Operating   Cash Flow

N/A

 $2.95 Billion

  $899.00 Million

Dividend   Yield

1.20%

0.40%

0.80%

Short   Position

1.40%

N/A

1.30%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for American Express is close to the industry average of 3.40, but saying American Express has shown quality debt management would be a downright lie. At least the company is heading in the right direction in this regard.

Debt-To-Equity

Cash

Long-Term Debt

AXP

3.11

$28.00 Billion

$59.00 Billion

MA

0.07

$5.04 Billion

$51.00 Million

V

0.00

$2.78 Billion

$0

 

T = Technicals Have Strong  

American Express has outperformed Mastercard and Visa year-to-date, but it has underperformed its peers over a three-year time frame. American Express offers the highest yield of the three (see chart in Catalyst section).

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1 Month

Year-To-Date

1 Year

3 Year

AXP

1.19%

18.63%

14.11%

54.86%

MA

-0.39%

9.15%

17.42%

111.80%

V

-0.85%

10.56%

36.48%

84.10%

 

At $67.75, American Express is trading above all its averages.

50-Day   SMA

65.03

100-Day   SMA

61.98

200-Day   SMA

59.50

 

E = Earnings Have Suffered a Setback             

Earnings had been improving on an annual basis since 2010, but there was a setback in 2012. However, revenue has climbed for three consecutive years.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

28.36

24.52

27.58

29.96

31.58

Diluted   EPS ($)

2.32

1.54

3.35

4.12

3.89

 

When we look at the previous quarter on a year-over-year basis, we see an improvement in revenue and earnings.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   billions

7.61

7.97

7.86

8.14

7.88

Diluted   EPS ($)

1.07

1.15

1.09

0.57

1.15

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

American Express should hold up better than its peers during difficult economic times, right? This is true, but only as long as the stock market and real estate market hold up. If one or both markets are to fall, then American Express clients will take the biggest hit due to heavy investment losses. Therefore, contrary to popular belief, American Express isn’t the safest option in the industry if we see a bear market. As for right now, it’s the perfect environment for American Express.

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Conclusion

American Express has performed well for several years, and the stock is still trading at a good value. However, it has underperformed its peers over the past several years, and debt and lack of resiliency are concerns.

American Express is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.

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