In this article, let's take a look at American Express Company (AXP, Financial), a $94.23 billion market cap company that is a leading global payments and travel & expense services company.
Spending patterns
American Express has a well-known brand and through the years it has formed a base of high-spending cardholders by offering good services as well as rewards, which are financed by high discount fees.
The company also developed valuable data about the spending habits of its customers which we believe is a very good strategy for future growth. Although it is nowadays in initial stages, having the knowledge of spending patterns is a valuable key driver.
We think that American Express can maintain a great share of payment volume in the future. Another strong advantage over competitors is that its network is resistant to regulatory changes. But thinking about today, the firm focuses on fee-based initiatives, including prepaid cards and online banking.
Revenues, margins and profitability
Looking at profitability, revenues declined by 0.44%, but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.40 vs $1.25). During the past fiscal year, the company increased its bottom line. It earned $4.88 versus $3.87 in the previous year. This year, Wall Street expects an improvement in earnings ($5.54 versus $4.88).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AXP | American Express Company | 28.99 |
| COF | Capital One Financial Corp | 10.09 |
| DFS | Discover Financial Services | 22.87 |
| CSH | Cash America International Inc | 9.47 |
| Â | Industry Median | 13.08 |
The company has a current ROE of 28.99% which is higher than the industry median and its peers Capital One (COF, Financial), Discover Financial Services (DFS, Financial) and Cash America International (CSH, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, this company could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 17.0x, trading at a premium compared to an average of 14.0x for the industry. To use another metric, its price-to-book ratio of 4.7x indicates a premium versus the industry average of 1.69x while the price-to-sales ratio of 2.9x is above the industry average of 2.69x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $27,713, which represents a 22.3% compound annual growth rate (CAGR).
Final comment
We believe that American Express will still focus on high-spending, creditworthy cardmembers while trying to making card products to specific customer segments.
Loyalty programs such as Delta SkyMiles are good in order to increase customer´s spending, who demand high-quality service.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), George Soros (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio) and John Rogers (Trades, Portfolio) bought this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
