4. Debt and Balance Sheet Strength
| American Express | MasterCard | Visa | |
| Total Assets | 152.9B | 9B | 40B |
| Cash & Short Term Investments | 26.4B | 6.5B | 7.25B |
| Inventories | 0B | 0B | 0B |
| Total Liabilities | 133.4B | 5.2B | 12.4B |
| Long-Term Debt | 56.3B | 0B | 0B |
| ST Debt & Current Portion LT Debt | 4B | 0B | 0B |
| Current Ratio | – | 2 | 1.5 |
| Quick Ratio | – | 2 | 1.5 |
| Risk-Based Capital Tier 1 | 12.7% | – | – |
Reviewing the companies under this critera does prove to be a struggle, while MasterCard and Visa have a solid balance sheets and no debt, American Express does have debt and, due to its lending division it only has a capital ratio of 12.7%. This makes American Express significantly less appealing than its competitors, who currently have no debt and large cash balances.
This round once again goes to MasterCard, with fewer liabilities and a higher portion of Cash and short term investments compared to its total asset pool.
5. Do the company’s products rely on a commodity?
In this case none of the companies products rely on commodity.
6. Is The Stock Selling At A 25% Discount To Its Real Value?
This is the deal maker. Unfortunately there is no definitive method to calculate Buffett’s perception of a discount to real value. If there was then his style would be very easy to replicate.
There is one way of working out a guess however that is through the Graham Number.
| Company | P/B | P/E | EPS | Book Value Per Share | Graham Value | Current Discount/Premium To Graham Value |
| AXP | 3.3 | 12.1 | $4.73 | $17.4 | $57 | -5% |
| V | 3.7 | 18.2 | $8.36 | $41 | $87 | -71% |
| MA | 9 | 19.5 | $25.5 | $55.7 | $176 | -175% |
Currently none of the candidates offer a significant ‘value’ opportunity. In fact both Visa and MasterCard present a significant prospective downside in the view of the Graham value.
Conclusion
Currently, none of the candidates present a value buying opportunity, however, American Express still seems to be the most undervalued stock of the group. Currently the stock provides a decent discount to its two peers, a constant, predictable return on shareholder equity and has a current price that is closest to becoming undervalued compared to its Graham value. On the other hand American Express does generate the lowest free cash flow and operating margin in the group as well as having the worst looking balance sheet.
Despite these negative factors, I believe American Express still presents a decent investment opportunity over both MasterCard and Visa, this is based on its historic shareholder equity returns and possibility of maintain these returns over future years providing a more sustainable return for shareholders.
The article Buffett, American Express, Visa and MasterCard originally appeared on Fool.com.
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