Pony Up for American Express

by Gene Marcial | March 16, 2012 9:05 am

American Express (NYSE:AXP[1]) isn’t just one of the country’s premier credit card companies. It’s also a financially solid financial house — and a rich source of comfort and rewarding returns for investors.

Just listen to the Fed, which this week gave American Express a sterling grade after delving deeply into, well, the company’s own credit standing. AmEx was one of the 15 financial companies whose comprehensive capital plan was reviewed by the Fed — and approved. (Those failing to pass muster[2]:  Citigroup (NYSE:C[3]), MetLife[4] (NYSE:MET[5]), SunTrust (NYSE:STI[6]) and Ally Bank.)

The conclusion of Chairman Ben Bernanke and the Fed’s analysts: American Express not only passed the stress test the banks had to undergo, it came out among the strongest top three, with an impressive 10.8% Tier 1 common capital ratio, including all of its proposed capital actions through the fourth quarter of 2013. The only banks rated higher were Bank of New York Mellon (NYSE:BK[7]) and State Street (NYSE:STT[8]).

“We think the pass is a positive for investor sentiment,” says Sonia Parechanian, financial analyst at S&P Capital IQ, who rates shares of American Express a strong buy. The company’s plans are certainly mighty enticing for investors: They include boosting the quarterly dividend by 11%[9], to 20 cents a share, and authorizing a $5 billion share repurchase program, which represents some 8% of its market cap — with up to $4 billion worth of buybacks scheduled for this year. AmEx currently pays a yearly dividend of 80 cents a share, for a yield of 1.5%.

Some Wall Street analysts promptly raised their earnings estimates for American Express after the Fed’s positive appraisal of its generous plans for shareholders. “We believe the repurchase authorization will increase shareholder value,” says David Darst, analyst at Guggenheim Securities. He raised his price target for the stock by $3 a share to $63. He also jacked up his 2012 earnings estimate by 7 cents a share, to $4.40, and hiked his 2013 forecast by 30 cents, to $5.10.

Darst forecasts revenue trends will stay positive in the years ahead as profitability remains above that of AmEx’s peers. Apart from posting above-peer billings growth and profitability from its traditional card business, AmEx is also positioning to become a leader in digital commerce with “significant value-adds to merchants,” notes the analyst.

AmEx’s business model is quite distinct from other rivals, such as Visa (NYSE:V[10]) and MasterCard (NYSE:MA[11]) in that its revenues are mixed, primarily driven by fee income. Visa and MasterCard, on the other hand, depend mostly on spread revenue. As a result, American Express has the strongest year-over-year revenue trends relative to its bank peers. In the fourth quarter of 2011, it generated a 36% return on equity which is also above those of its peers. The company’s income from fees accounts for more than 80% of the company’s total revenue.

One additional fillip to investors: American Express’s stock is cheap, despite its leap to a 52-week high of $56.72 on Mar. 15. That’s a long way up from its 52-week low of $41.30 in August 2011. But even at its current price, the stock is trading at just 10.9 times Guggenheim’s 2013 earnings estimate. That’s far below the five-year average of 13.7 times forward earnings, notes Darst. While that price-earnings ratio is much higher than the 6.5 forward P/E in March 2009, it’s still way under that measure’s peak of 22.4 in May 2009.

Darst’s price target of $63, or a projected P/E of 14, approximates the five-year forward average of 13.7. So, anyway you slice the P/E, AmEx stock is darn cheap. And based on its projected sales and earnings growth, the stock is just as inexpensively attractive.

Given its solid financial moorings, plus the alluring hike in dividends and share buybacks that should boost the company’s earnings per share, American Express is gold as an investment bet in the debt-ridden financial industry.

Source URL: https://investorplace.com/2012/03/pony-up-for-american-express/

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