Sunday, June 22, 2008

AXP (American Express): Don't Leave Your Portfolio Without It

To begin with, I love my AMEX card. I love the rewards, I love the customer service and I use it every chance I get.

So let's take a look at the stock. Right now it's at a five-year low and although the credit market is not looking so hot right now, all I see is a great opportunity. It is currently trading at a P/E of 12.5 and historic low average is at around 16.

Plus, this 150-year-old blue chip is wholly shareholder-friendly, distributing the majority of the capital it generates to shareholders via repurchases and dividends. Since 1994, 71% of capital generated has been returned to shareholders via repurchases and dividends. Last year, the total was an impressive 88%. That's all money back to us.

Buffet bought his 12% of the company a long time ago but I doubt he's the least bit concerned about whether AXP is going to continue to make money and grow at a blazing 12% rate. Here's the kicker, Visa lost a $1 Billion last year and the Market Cap is trading at $90B, MasterCard made a $1 Billion and it's market cap is $38.11 B. AMEX MADE $4 BILLION LAST YEAR and it's Market Cap is ONLY $49 Billion! If you can't see the value there, you're blind.

Oh did I mention their cash on hand around 20 Billion?

What's there to be fearful about with American Express? The company is a money making machine. The richest people in the world use American Express, which means a) that they spend the most money, and b) that they rarely default, AXP has the lowest default rate among credit card lenders. That's due to the fact that they only issue cards to people with good credit histories. The service is unbeatable which is why any reputable company takes them, and has all of its employess run expenses through them. AXP is a goldmine, the earnings barely slipped last quarter and if anything, they did incredibly well relative to any other bank.

The last points of interest that I dug up is that CEO Ken Chenault won't earn his options unless the company hits some impressive performance targets. The bottomline is, he has a lot of incentive to kick some major ass because he won't get bailed out. He has to earn it. Imagine how much harder pro athletes would play if they were under the same system.

When the economy recovers and cardholders dust off their wallets, AXP has a great shot at charging back to the top.


An additional update - June 26, 2008:

American Express will be receiving 4 billion from Visa and Mastercard over the next 3 years from anti-trust settlements. It's a year's worth of money for free. The bottomline is American Express now has some padding and protection for the next few years to help them get through the near term pain.

In Portfolio: Of course
Duration: Forever
Lakers: We'll be back next year.