One of Warren Buffett (Trades, Portfolio)’s favorite stocks has fallen significantly. After reaching its all time high of nearly $95 per share in July 2014, American Express (AXP, Financial) has dropped continuously to only around $55 per share. Investors have seemed to lose confidence in this credit card company.
There are several reasons for this plunge in the stock price.
First, American Express lost its deal with Costco (COST, Financial), one of its two largest co-brand relationships. About 30% of the company’s transactions came from co-branded products, and Costco took around 10% of worldwide cards and 20% of its loan book.
Second, American Express recently reported weak fourth quarter profit in 2015 at $899 million, down from $1.4 billion a year ago. Its diluted EPS came in at 89 cents compared to $1.39 last year. CEO Ken Chenault stated that the weak performance resulted from pressures on merchant fees, intense competition and other cyclical factors.
If we look more carefully at its operating performance in the fourth quarter, however, American Express' earnings were heavily affected by $419 million ($335 million after tax) charge, including impairment of goodwill and technology assets and the strong appreciation of the U.S. dollar. In addition, last year's earnings had $719 million gain ($453 million after tax), equivalent to 46 cents diluted EPS, from the sale of American Express’ investment in Concur Technologies. The Concur gain last year had been booked into the Global Commercial Services segment.
On a positive note, American Express’ card services business has experienced good growth. U.S. Card Services delivered $799 million in fourth quarter net income, with 20% year-over-year growth, while the International Card Services’ net income was $73 million, up from $33 million last year. Global Network & Merchant Services generated the same fourth quarter net income of $417 million. To improve the company’s operating performance, Chenault targeted $1 billion in cost savings. For the full year 2016, he expected that the company would generate $5.40 to $5.70 earnings per share, including the large gain from loan portfolio sale.
At the current price, American Express is trading at around 10 times its 2016 expected earnings. Even when we adjust the loan portfolio gain, the earnings multiple is only around 12. With 114 million cards in force and more than $68 billion in loans, American Express is still truly one of the global leaders in card business and has a premier branded payment network. Thus, I believe the company should be worth more than just 12 times expected earnings. Investors should feel confident when having this stock in their portfolios, along with the company’s biggest shareholder, Warren Buffett (Trades, Portfolio).
