American Express Company (NYSE:AXP) is a true old age behemoth of investing. The company is one of Warren Buffett’s favorites and is one if the Dow 30. However, how does the company stack up to its newer rivals – Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA)
One of the main draws of investing in a company like American Express is the fact that the company can run itself. There is no need for complicated management decisions like industrial companies or basic material companies. In addition, both Visa and MasterCard have the same kind of business and they could effectively both run themselves.
American Express has one major difference between Visa and MasterCard. American Express lends money to customers and derives the vast majority of its income from customer interest on credit card loans. Both Visa and MasterCard only offer a payment network, skimming revenue off of each transaction and neither of them has any loan exposure or potential customer default risk.
So, who presents a better investment opportunity right now based on Warren Buffett’s investing criteria?
Buffett’s Berkshire already owns all three of these card providers, but what about the average Foolish investor who does not have as much cash as Buffett and was not savvy enough to open a position in American Express all those years ago?
So the criteria I will be reviewing the companies on are:
1. Value – A basic ratio comparison of each firm. It’s well-known that Buffett likes to buy stocks that are going cheap and undervalued vs. their peers. This will help put together a quick overview.
2. Company Performance For Investors - What is the ROE for each firm and who is generating the best and continually improving return on equity for equity holders.
3. Cash Flow And Profitability – A good free cash flow can be the key for future shareholder returns. A decent cash flow usually stems from a decent profit margin.
4. Debt And Balance Sheet Strength – does the company have and debt? Can it repay/service interest on current debts?
5. Do The Company’s Products Rely On A Commodity? – Companies that have products based on commodities do not have pricing power, therefore margins can become unpredictable.
6. Is The Stock Selling At A 25% Discount To Its Real Value – The deal clincher for Buffett, even if all of the other points are positive, if the stock is not a buy.