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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Value Trap Alert: American Express

AmEx is an iconic American brand, but it won't outpace the growth of the S&P 500

January 18, 2016 | About:

American Express (NYSE:AXP) provides charge and credit payment card products and travel-related services to consumers and businesses worldwide.

Visa (NYSE:V) and MasterCard (MA) are the leaders in the industry, growth forcasts look optimistic, and over the last five and 10-year periods, the stock has lagged the S&P by 10%, and 29%. American Express should continue lag the market well into the future.

Recent history shows a very interesting trend of both growth and stagnation.

2005:

  • Revenue: $23.3 billion.
  • Income: $3.7 billion.
  • Book: $8.97 per share.
  • Price: ~ $50 per share.

2010:

  • Revenue: $27.8 billion.
  • Income: $4.05 billion.
  • Book: $13.56 per share.
  • Price: ~ $45 per share.

2015:

  • Revenue: $33.6 billion.
  • Income: $5.7 billion.
  • Book: $21.68 per share.
  • Price: $62.91* per share.

*As of close on Jan. 15

Growth forecast

I don’t think of value traps as stocks that are going to lose investors money, but more from an opportunity cost point of view. I think of it in terms of how it will stack up against a standard market benchmark. As an example, look at my article on L3 Communications (LLL), which in September 2011 was trading at $58 per share. At the time, I thought it was definitely a value trap. The stock was trading at 7x earnings then, now it’s at 80x earnings having seen its revenue, earnings, and book value all erode since 2011. Of course, the price appreciation has actually matched the growth of the S&P 500 in the last four years, but fundamentally, the company is a lot worse off.

With that said, American Express is a different type of company. I believe that you can rest assured that payment processing will continue to necessary for the foreseeable future. Even if some Bitcoin blockchain type of system ultimately becomes commercially viable, credit services will be necessary. That alone is enough to make American Express worth an investment if you don’t care about outperforming the S&P 500.

The company should continue its upward trend in revenue, earnings, and book value. It should continue to buy back its own shares and will still be a great American brand. However, if you’re looking to earn better than market rates of interest, American Express (at this price anyway) is probably not going to help you do it. I put this stock in the same category as Wal-Mart (WMT), an old company earning a lot of money, but not able to grow faster than the overall market on a percentage basis.

So, unless you have just won the Powerball and want to keep what you’ve earned instead of achieving 2x, 4x, 10x growth, then American Express is not the stock to buy right now, even though it’s trading at a very low P/E multiple at prices investors haven’t seen since 2013.

In my opinion, this is an industry where a lot of new innovation (e.g. FinTech) is going to continue pushing rates down and if Bitcoin or some other type of low/no fee alternative does go mainstream globally, new credit services will disrupt and displace companies like Amex, Visa, and MasterCard.

This idea hasn’t stopped many guru investors from piling into the stock. Yet, looking at their track records over the last five and 10 years, most haven’t outperformed the market, most likely suffering from the “too many assets under management” syndrome. It’s really hard to outpace the S&P 500, especially when you have a lot of capital and fewer opportunities to move the performance needle. This is a fact that even the Oracle of Omaha is facing, head on, as Berkshire’s cash piles up. Berkshire owns more than 15% of the company and while I can’t see any reason for Warren Buffett to sell it now, new buyers should not be looking at this company. Again, unless you have billions of dollars and don’t care about outpacing the growth of the market.

In a nutshell, The stock would have to get down to about $30 to $35 per share to make it worth owning.

Disclosure: I have no position in the stock.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website


Rating: 2.6/5 (8 votes)

Voters:

Comments

raj123456789
Raj123456789 - 3 years ago    Report SPAM

Jonathan, Can you suggest a better buy than AXP at these prices?

Jonathan Poland
Jonathan Poland - 3 years ago    Report SPAM

No. Even with the stock down 6 points today, it's still not a buy. But, it depends on what you're looking for. Want to beat the market, this is not a stock with the high potential to do that going forward.

rrurban
Rrurban - 3 years ago    Report SPAM

"In a nutshell, The stock would have to get down to about $30 to $35 per share to make it worth owning."

I agree. The stock looks to be worth about $70-75 but in a negative valuation trend. Under $40 is a good place to get more interested in AXP.

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