American Express (NYSE:AXP): Playing cards with Wal-Mart (NYSE:WMT)

This week CapitalCube examines American Express Company (NYSE:AXP) which has teamed up with Wal-Mart Stores, Inc. (NYSE:WMT) to provide low-income shoppers with a pre-paid debit card called Bluebird. AXP stock gained 26 cents yesterday while WMT stock closed 12 cents higher.

CapitalCube analyzes American Express Company (NYSE:AXP) relative to its peers which include: JPMorgan Chase & Co. (NYSE:JPM), Visa Inc (NYSE:V), Citigroup Inc. (NYSE:C), Bank of America Corp (NYSE:BAC), Mastercard Inc (NYSE:MA), Capital One Financial Corp. (NYSE:COF), Discover Financial Services (NYSE:DFS), and Cielo S/A (CIEL3). AXP stock scores 83 for its Fundamental Analysis relative to peers. For more on CapitalCube’s scoring system click here. For a similar peer-based fundamental analysis of Wal-Mart Stores, Inc. (NYSE:WMT) log in.

AmericanExpress_NYSE_AXP_Stock_Score

Relative Valuation

P/B above peers
American Express Co. currently trades at a higher Price/Book ratio (3.4) than its peer median (2.2).

Valuation Drivers

Outperforming
AXP-US outperforms its peers with a relatively high operating performance and the market also expects faster growth relative to its peers

Operations Diagnostic

AXP-US’s median net profit margins and relatively high capital efficiency give it some operating leverage.

Earnings Leverage

Leader
The company’s year-on-year change in revenues and earnings are better than the median among its peer group.

Sustainability of Returns

Sustainable
AXP-US’s return on equity currently and over the past five years suggest that its relatively high operating returns are sustainable.

Growth Expectations

Strategic Play
While AXP-US’s revenues have increased slower than peer median, the market currently gives the company a higher than peer median PE ratio and may be factoring in some sort of a strategic play.

Capital Investment Strategy

The company’s level of equity capital investment suggests it might be under-investing in a business with above median returns.

Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.

Share Price Performance

Relative underperformance over the last year and the last month suggest a lagging position.

AXP-US’s share price performance of 34.9% for the last 12 months is below its peer median. The 30-day trend in its share price performance of 2.4% is also below the peer median implying that the company’s stock performance is lagging its peers.
Stock price performance over the last month vs. last year charted with respect to peers for American Express Co. (NYSE:AXP)

Drivers of Valuation: Operations or Expectations?

Valuation (P/B) = Operating Advantage (ROE) * Growth Expectations (P/E)

Price/Book or P/B valuation is a function of the observed operating performance of the company as measured by ROE multiplied by the market’s current implied growth expectation as measured by the P/E. We define Valuation Premium as the difference between the Market Capitalization and Book Value of Equity, and as a proxy for the NPV of cash-flow associated to the Book Equity investment.
Based on the analysis of the relative contribution to the P/B valuation of “Operations ROE” vs. “Expectations P/E”, we quickly garner insight into peers comparative performance and the market’s assessment of their strategies – are they just “Harvesting” the current business pipeline or are investors betting on a strategic “Turnaround”?

AXP-US has an Outperforming profile relative to peers.

AXP-US achieved a better operating performance than the median of its chosen peers (ROE of 26.7% compared to the peer median ROE of 9.5%) and the market still expects faster growth from it than from those peers (PE of 13.7 compared to peer median of 10.1). The company currently trades at a higher Price/Book ratio of 3.4 compared to its peer median of 2.2.
Drivers of Valuation: Operations or Expectations? Operating Advantage or ROE% vs. Growth Advantage or P/E for American Express Co. (NYSE:AXP)
AXP-US has moved to an Outperforming from a relatively high ROE profile at the recent year-end.

AXP-US’s ROE is similar to its five-year average ROE of 26.5%. The decrease in its ROE to 26.7% from 27.6% (in 2011) was also accompanied by a decrease in its peer median during this period to 9.5% from 14.2%. Relative to peers, ROE rose 3.7 percentage points.
AXP-US’s current PE is similar to its average year-end PE of 13.8 over the last five year-ends. PE increased to 13.7 from 11.3 (at recent year-end 2011) unlike its peer median, which decreased during this period to 10.1 from 11.3. Combining both ROE and PE suggests that AXP-US’s current PB (price/book) of 3.4 is similar to its average year-end PB of 3.3 over the last five year-ends.
Graph of ROE% on Common Equity showing Peer Median (TTM) for American Express Co. (NYSE:AXP)
Graph of Price to Earnings for American Express Co. (NYSE:AXP) showing Peer Median (TTM) for American Express Co. (NYSE:AXP)

Operations Diagnostic

AXP-US’s median net profit margins and relatively high capital efficiency give it some operating leverage.

The company’s median net profit margins of 15.1% and relative capital efficiency (capital turns i.e.revenue/equity of 1.8x compared to peer median of 0.5x) give it some operating leverage.
Asset Efficency or Sales/Total Assets vs. Net Margin% or NI/Sales with respect to peers for American Express Co. (NYSE:AXP)
AXP-US has moved to a relatively high capital efficiency from an Volume Driven profile at the recent year-end.

AXP-US’s net margin is its highest relative to the last five years and compares to a low of 8.0% in 2009. Though its net margin has remained relatively stable at 15.1% compared to 2011, its peer median has decreased to 16.4% from 20.3% during this period. Net margin rose 4.0 percentage points relative to peers.
AXP-US’s capital efficiency (revenues/equity) is its lowest relative to the last five years and compares to a high of 2.9 in 2007. Compared to 2011, capital efficiency has remained relatively stable for both the company (1.8) and the peer median (0.5).
Graph of Net Margin% showing Peer Median (TTM) for American Express Co. (NYSE:AXP)
Graph of Capital Efficiency (Revenues/Shareholder Equity) showing Peer Median for American Express Co. (NYSE:AXP)

Earnings Leverage

Year-on-year change in revenues and earnings are above the median among its peers.

The company enjoys both better than peer median annual revenue growth of 6.7% and better than peer median earnings growth performance 19.3%. AXP-US currently converts every 1% of change in annual revenue into 2.9% of change in annual reported earnings. We view this company as a leader among its peers.
Earnings Leverage Earnings Growth % vs. Revenue Growth % charted with respect to peers for American Express Co. (NYSE:AXP)

Sustainability of Returns

AXP-US’s relative returns suggest sustainable outperformance.
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Growth Expectations

The stock price is likely factoring in some chance for a strategic play.

While AXP-US’s revenues have increased more slowly than the peer median (0.4% vs. 12.0% respectively for the past three years), the market currently gives the company a higher than peer median PE ratio of 13.7. The stock price may be factoring in some sort of a strategic play.
Growth Expectations or 3 Year Revenue Growth % vs. P/E charted with respect to peers for American Express Co. (NYSE:AXP)

Capital Investment Strategy

AXP-US seems to be under-investing in a business with above median returns.

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Key Valuation Items

American Express (NYSE:AXP): Playing cards with Wal-Mart (NYSE:WMT)

Revenues & Margins

American Express (NYSE:AXP): Playing cards with Wal-Mart (NYSE:WMT)

Key Assets (% of Revenues)

American Express (NYSE:AXP): Playing cards with Wal-Mart (NYSE:WMT)

Key Liquidity Items

American Express (NYSE:AXP): Playing cards with Wal-Mart (NYSE:WMT)

Key Cash Flow Items (% of Revenues)

American Express (NYSE:AXP): Playing cards with Wal-Mart (NYSE:WMT)

Company Profile

American Express Co. is a global payments and travel company. The company, through its subsidiaries, offers products and services including charge and credit payment card products and travel-related services to consumers and businesses around the world. It focuses on generating alternative sources of revenue on a global basis in areas such as online and mobile payments and fee-based services. The various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations through various channels, including direct mail, online applications, targeted direct and third-party sales forces and direct response advertising. American Express operates through four reportable segments: U.S. Card Services, International Card Services, Global Commercial Services and Global Network & Merchant Services. The U.S. Card Services segment offers a wide range of card products and services to consumers and small businesses in the United States and provides travel services to card members and other customers. The International Card Services segment offers proprietary consumer and small business cards outside the United States. The Global Commercial Services segment provides expense management services to companies and organizations worldwide through its Global Corporate Payments and Global Business Travel businesses. Global Corporate Payments offers a range of expense management solutions to companies worldwide through its Corporate Card Programs and Business-to-Business Payment Solutions. Global Business Travel provides globally integrated solutions, both online and offline, as well as through mobile applications, to help organizations manage and optimize their travel investments and service their traveling employees. The Global Network & Merchant services segment operates a global payments network that processes and settles proprietary and non-proprietary card transactions. It also provides point-of-sale products, multi-channel marketing programs and capabilities, services and data, leveraging the global closed-loop network. The company was founded by Henry Wells, William G. Fargo and John Warren Butterfield on March 28, 1850 and is headquartered in New York, NY.

Disclaimer

The information presented in this report has been obtained from sources deemed to be reliable, but AnalytixInsight does not make any representation about the accuracy, completeness, or timeliness of this information. This report was produced by AnalytixInsight for informational purposes only and nothing contained herein should be construed as an offer to buy or sell or as a solicitation of an offer to buy or sell any security or derivative instrument. This report is current only as of the date that it was published and the opinions, estimates, ratings and other information may change without notice or publication. Past performance is no guarantee of future results. Prior to making an investment or other financial decision, please consult with your financial, legal and tax advisors. AnalytixInsight shall not be liable for any party’s use of this report. AnalytixInsight is not a broker-dealer and does not buy, sell, maintain a position, or make a market in any security referred to herein. One of the principal tenets for us at AnalytixInsight is that the best person to handle your finances is you. By your use of our services or by reading any of our reports, you’re agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that AnalytixInsight, its directors, its employees, and its agents will not be liable for any investment decision made or action taken by you and others based on news, information, opinion, or any other material generated by us and/or published through our services. For a complete copy of our disclaimer, please visit our website www.analytixinsight.com.
This article was originally written by abha.dawesar, and posted on CapitalCube.
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