American Express (AXP - $27)(AXP)
American Express is a payments company with one of the best brands in the world. Despite strong earnings growth over the past few years, the strength of the franchise was called into question recently when revenue growth slowed. Skepticism increased in February when Costco announced it would not renew its co-brand partnership with American Express. We believe this will cause earnings growth to slow for two years while American Express invests in marketing efforts to replace Costco co-brand customers, but we believe the company’s financial fundamentals remain very healthy. Card member spending is growing 7% per year (f/x adjusted), ROE is well above its 25% target and robust capital levels are allowing management to increase share repurchases. Despite what we believe is favorable secular growth and superior economics, American Express is trading at a large discount to the market and its historical multiples. Our long-term view allows us to look past the short-term disappointment of the Costco announcement and see the potential lucrative long-term value of American Express’ global payment network and growing customer base.
From Bill Nygren (Trades, Portfolio)'s Oakmark Fund Second Quarter 2015 Commentary.
