American Express Analysis

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Here is a link (opens PDF) to a 9 page analysis I did of American Express (AXP).  Warning: it is a bit dry.  I was going to present American Express at Value Investing Congress in Pasadena, but the stock ran up and exhausted a good portion of margin of safety.  

Amex is one of the best, most transparent (you can actually analyze it) financial companies I’d want to own in today’s environment.  We’ll probably get an opportunity to load up on it in the future, albeit at a lower price.

I ended up presenting my very contrarian case on Joseph A. Bank, 93% of float is short.  Here is a link to the full presentation, JOSB starts on slide 31.   

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9 Comments

  1. Vitaliy,

    Thank you very much for sharing your professional analysis on AXP with your readers! I thoroughly enjoyed it. Please let me know if you would be interested in a gues post on my blog.

  2. From an historical basis of the lowest AXP has ever been traded at relative to its value, what would be the price of AXP today based on its present value?

    Sam Marx

  3. Hi Mr. Katsenelson:

    I’m finishing up your book now, and I’ve thoroughly enjoyed it. It’s the best investment book I’ve read in the last couple years for sure, and I thank you for putting it out there.

    One question I had revolves around your absolute P/Es, and it (marginally) ties into what I see you using in your terminal P/FCF condition for JOSB. For instance, there’s a great difference in the P/Es afforded to a restaurant with a clean balance sheet growing at x% and a retailer with a clean balance sheet growing at the same rate. The retailer will always be valued at a considerably lower multiple of earnings. Obviously there’s higher operational risk in that a retailer has a higher percentage SG&A and carries several months of inventory versus a restaurant’s several days, so a retailer might get stuck paying COGS for sales that don’t materialize and can’t be as nimble bringing down expenses if sales are disrupted… and also people are more likely to forego buying new clothes in down times than they are to forego buying lunch. However, for me to come up with an operational risk adjustment that quantifies these and has any chance of ever making a restaurant look attractive relative to a retailer, I’d have to look at current industry P/Es to get a sense of the magnitude of operational risk adjustment to use to level the playing field… but if I’m looking for undervalued industries/companies and using current P/Es to create my operational risk adjustment, I’m undermining my own efforts by justifying existing P/Es that may be wrong. Perhaps the lesson to take away from this limited example is that the playing field should not be leveled, and retailers are a more likely area for good investments, and perhaps this is further justified based on the fact that the higher P/E restaurant growth stories should be in for more p/e contraction over the next decade… but I’m just having trouble coming up with meaningful operational risk adjustments to absolute P/Es that really levels the playing field across industries to the proper degree. Do you have any suggestions for further reading, or items to consider along these lines?

    Hmmm… a bit of a long comment(?) for this forum. My apologies. If you can’t respond here, no problem. I love the book.

    Thanks again
    kevin

  4. I would love to buy your book, however everything I read is now on my Amazon Kindle. Can you please get your book on Kindle and let me know when it is ready. Thanks!

  5. Dear:

    Dividend Growth Investor, I don’t have the time to guest post, but if you’d like to use one of my articles and repost it on your blog with proper attribution, we may do that.

    Sam, In my analysis I discuss DCF results as well, it is about the same $55-60 or so.

    LB, Wiley informed me that my book is in process of being converted to Kindle.

    Best.

    Vitaliy

  6. Thank you for the excellent write-up of AmEx. Can you please explain the math on how you get to 2007 EPS of $2.52, specifically the adjustment regarding the increased default rate of 5%. On page 35 of the 2007 annual report, I calculate a current provision on a GAAP basis of 4.8% (a provision of $2,650 billion on $54.5 billion of total loans). This would suggest a much smaller adjustment to get to 5%.

    Thanks

  7. Hi Vitaliy,

    In reading your book I found it very useful to analyze the 3 year, 5 year and 10 year trailing P/Es for the S&P500 to smooth out cyclical noise and normalize the broad economy’s profitability.

    I was wondering where you usually get your data to create these graphs / data-sets – I am guessing maybe bloomberg? And, do you recommend that we do a similar run of 5 – 10 year trailing P/Es for individual stocks to gauge that company’s specific valuation. Assuming you use bloomberg, is there other online databases or services that might provide the same data online without the terminal. Our office is considering Capital IQ (expensive though) or Compustat. Do you have an opinion on either?

    Thanks in advance for any insight!

    Best,

    Luis

  8. Hi Luis,

    In my book I used Robert Shiller’s data. I do use Compustat and I believe it is excellent product. I’ve been using it for 11 years.

  9. Nice information on credit cards.And now a days there are a lot of facilities offering by different banks so that to increase the user rate.And recently military credit cards are offering the best facilities.The best thing about this card is it automatically pays you the rewards in your account monthly without the usual $50 minimum like most credit cards.

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