I’ve been circling American Express (NYSE:AXP) as a portfolio candidate ever since I began investing in the mid-1990s.
I’d certainly be due plenty of criticism for missing the boat when the stock was at $10 a share back then, and for missing out when it backed off its $60 high in the early part of the century to $30 in September 2001. I certainly am wishing I’d bought in at the height of the financial crisis when the stock was back in the teens … but who can blame me for avoiding a financial stock at the time?
The question is whether now is the time to get in, as the stock could soon breach its all-time high of $65.
The most important part of examining American Express is to understand that it is not just a credit card company. If it were, I’d have reservations. However, the company has had many arms of business for many years.
Most know AXP’s consumer and business travel services, and things like stored-value cards, including travelers checks. But it also is very active with network services, merchant acquisition and processing, point-of-sale and the all-important marketing and information products for merchants. It relies on a bevy of fee services that analyze markets and trends, and has a robust fraud prevention service division. And, of course, it’s that aforementioned merchant fee structure where AmEx makes a lot of its money.
Concerning American Express’ financials: The company doesn’t carry long-term debt, but it is responsible for paying all the merchants people charge their card against. AXP owes about $41.7 billion and is due roughly $46 billion in customer receivables. Coupled with the $22 billion it has in cash, American Express is more than covered on what it owes.
Stock analysts looking out five years on American Express see annualized earnings growth at 10.9%. At a stock price of $62, on FY2013 earnings of $4.75, AXP trades at a P/E of 13. Discover Financial Services (NYSE:DFS) trades at 8.5 times earnings on 10.8% long-term growth, while payment processors MasterCard (NYSE:MA) and Visa (NYSE:V) trade at a 20 P/E on 18% growth. So compared to its peers, it’s on the expensive side.
What do I make of all these numbers? There’s certainly nothing bad here. I could do worse than own a global brand name, chugging along with a nice growth rate and a diversified financial services model. And yet, I’m just not all that compelled. There is risk involved at this price. If the financial services sector experiences another air pocket, AXP could get hammered.
That being said, if that happens, I would be very eager to jump in at a bargain price. (Yes, I know I had that opportunity before, but now I’m paying much closer attention.)
As a note, there’s a lot to like about Visa and MasterCard. Together, they own the lion’s share of the payment processor market and aren’t as exposed on the financial side. I think I’d prefer going with the big market leaders here, even though AmEx’s demographic is more upscale.
After all, 20% growth is hard to pass up. If I’m going to overpay, I’d rather overpay for that kind of growth.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.