- American Express had a horrible 2015 which has adversely affected the share price. The Costco Loss, impending court cases and the strong dollar have all stifled growth.
- The company is undervalued compared to its peers in this sector. Every $100 invested will get you over $7 in earnings which is high for such an established company.
- Strong hands are starting to see value here. Value Act (known for deep value investing) invested over $1 billion in August of this year.
American Express (NYSE:AXP) has had a rough year to date with the stock currently trading at just over $77 a share which is almost a 18.4% drop from where it started the year. This is mainly due to the Costco fallout which has cost the credit card company millions in revenue but it has had plenty of time to prepare for this loss. The stock is oversold here when compared to the Financial Sector ETF (NYSEARCA:XLF) which is only down 8.4% year to date and the S&P500 (NYSEARCA:SPAL) which is down less than 5% (see chart). Nevertheless the credit card company is up almost 3% over the last week as a result of the Sam's Club --owned by Wal-Mart (NYSE:WMT)-- deal which will add 650 more locations in the US and Puerto Rico from the 1st of October.
There will always be room for a credit card company that is tailored towards high net worth individuals because of the closed loop network it creates. Merchants are willing to pay the added fees to American Express because they know these affluent credit card users will spend more through their cards. Furthermore American Express is then able to fund its very generous loyalty programs from the fat fees it receives from the respective merchants.
The decline in the share price has resulted in a low current PE ratio of 13.63. I think its time to go long again. Let's take a closer look at the fundamentals. This stock traded at $95 a share in 2014 but in my opinion, its long term fundamentals have not changed much, which is why I am bullish. This stock has always been viewed by investors as a finance anchor in a diversified portfolio whether the portfolio was set up for income growth or capital gains. Here is a breakdown of its financials over a 10 year period
- Years of Dividend Increases - 4
- Profit Margins - 19% - Increasing
- Healthy Balance Sheet - $157 billion - Increasing
- 10 Year Price History - Up 30% excluding Dividend
- Competitive Advantage - Worldwide Brand, Customers For Life, Strong Merchant Network
- Revenues - $31.8 billion - Increasing
- Free Cash Flow - $1.9 billion - Stable
- Resistant To Recessions - Revenue recovered quickly in 2010 to reach $32.9 billion which was higher than pre-2008 levels
American Express bears may point to its revenues metric declining as of late but the Sam's club deal mentioned above should definitely help turnover from October onwards. American Express's competitor Visa (NYSE:V) is up over 8% already this year but I still prefer American Express due to Visa's dividend being much smaller and it is also currently selling at a premium with a PE ratio of 28. However, I believe the whole credit card sector will grow going forward because of the high barrier to entry that exists in this sector. Furthermore only 15% of the global market has payment processors in place which means there is still ample runway for credit card companies especially in emerging economies.
There also are other factors that are contributing to American Express's lack lustre performance of late. In February of this year the credit card company announced that its partnership with JetBlue would be ending which definitely enhanced the Costco losses. Nevertheless the real pain for shareholders came in July when the credit card company got hit with a lawsuit filed by some investors who claimed they were being mislead about the financials of the Costco deal. The respective investors claimed that compensation should have been paid out to investors who bought the stock between October 2014 and February 2015. The reason being American Express seemingly failed to notify shareholders in October of 2014 that the Costco contract was being discussed and under renewal. The announcement of the lawsuit saw the American Express stock price tank by another $3 per share in last July which alienated even more investors. Furthermore, the credit card company is appealing a decision in a February court case, where the respective Judge sided with merchants by stating they were free to recommend cheaper cards to customers. All of this issues are putting a dark could over this stock which is why the share price is underperforming.
However in this industry, there are always problems with regulators, shareholders, customers, etc. Wells Fargo & Co (NYSE:WFC) for example had its share of problems and continues to have them but since its a market leader, I have no doubt it will continue to dominate. I see the same for American Express especially when you take note of recent developments.
Firstly, you had Value Act Capital in early August investing $1 billion into American Express. Value Act is known in the industry for investing big in highly oversold companies. When the news hit, shares rose to over $81 a share but since then they have come back down meaning value investors can now buy American Express stock for the same price Value Act got it at. What investors need to consider here is that Value Act's investment netted it just over 11 million shares. American Express has already announced a share buyback plan of 150 million shares in May of this year which still hasn't gone ahead. Given the huge history of buybacks American Express has, I see the buyback going ahead which will drive the share price higher on increased EPS, going forward. When companies with sound fundamentals and assets get oversold, the companies in question slowly move into stronger hands. We see this presently in the mining sector with Carl Icahn investing in multiple depressed mining companies such as Chesapeake Energy (NYSE:CHK) and Freeport-McMoRan (NYSE:FCX). Investors should remember that Warren Buffet owns 151.6 million shares of American Express and with the stock on sale, I wouldn't be surprised seeing him up his stake even though his stake in the company will increase as a result of the impending buyback program.
To sum up, I would recommend being a buyer here. 2015 has been a year to forget for the company but investors have the opportunity to take advantage. Strong hands are investing to drive the company forward and with brand building initiatives such as Small Business Saturday and the Plenti Loyalty program, it would be unwise to bet against American Express stock here.