A Financial Company With Great Growth Potential
Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Question: What Dow component provides exposure to the financials, security, and the potential for great gains? That company is American Express (NYSE: AXP).
American Express has been going strong since 1850 when the firm was in the business of travelers’ checks. As time has progressed, technology did as well, and American Express become one of the leaders in offering credit cards to individuals and corporations around the world.
The largest portion of American Express revenues come from card transaction & execution fees. These fees bring in 70% of American Express’ business. Other divisions at the company include the aforementioned travel services division that now makes up only 10% of the company.
Bosses & Owners
Kenneth Chenault is the long standing Chairman and CEO of American Express and has been at the helm for over a decade. Throughout his time at the company American Express has outperformed the Dow Jones by close to 60%.
Insiders at this company own 1.3% of the outstanding stock. The largest holder of American Express stock is Warren Buffett’s Berkshire Hathaway who has held the stock for a few decades. Berkshire Hathaway holds 13% of outstanding American Express stock.
How’s The Performance?
American Express has had a wonderful year. The company has managed to gain an incredible 20% which beat the Dow Jones by 12% and the S&P 500 index by over 6%.
Over the last decade at American Express revenues have grown from $23.81 billion to $32.28 billion. This represents a 35.6% growth over those 10 years or an annualized growth of 3.1% per year. The reason for the great growth in stock price is in part due to the management of Kenneth Chenault. He many have only grown sales by 35.6% but the EPS during that time grew 103%, an annualized rate of 7.4%.
Sales at American Express have experienced a 5-year annual average growth rate of 3.11%, over the same time frame the dividend has grown 4.78% and net income has risen at a rate of 5.96% per year on average.
American Express is currently trading with a PE ratio of 13.3. The price to sales ratio is 1.93 and the price to book value may be a bit high for some investors at 3.32.
There is no shortage of competitors handing out credit cards in the world, leaving American Express with a variety of competitors in Discover Financial (NYSE: DFS), Visa (NYSE: V) and MasterCard (NYSE: MA).
Visa is the world's largest payment processor and it carries a market cap of around $100 billion at the time of writing. The company has an exclusive agreement with Dollar General and is the only card accepted in their 10,000+ retail locations. Visa also operates to gain exclusivity in many other areas, particularly with collegiate institutions where they try to shun MasterCard to gain these massive payment transactions.
While Visa is trying to keep MasterCard from the collegiate institution game, MasterCard is playing the same game by offering rock bottom fees to colleges to be able to take payments exclusively. Sam's Club, one of the nation's largest wholesale stores accepts MasterCard credit cards at their checkouts while not allowing Visa credit cards to perform the same transactions.
Not to be outdone in exclusivity, AmEx is the exclusive card of Costco. Costco is growing rapidly around the world and this exclusivity deal will yield great returns for many years to come.
While both Visa and MasterCard duke it out against each other, outsider Discover is left with a lot of room to run. The company is currently offering great value that may give investors a solid, but riskier, investment.
Being a worldwide financial company the biggest risk to American Express is the global capital markets and their potential for failure. American Express is at the whim of many governments and their requirements worldwide as well as overall consumer and business spending.
The company must also have access to liquid capital markets in order to fund their operations. Any downturn in these markets or a downgrade in the company’s credit ratings by Standard & Poor’s or Moody’s could result in issues for the company as a whole.
Being a worldwide company, the potential for inflation and currency fluctuations in countries around the world could prove to be detrimental to the business of American Express.
American Express could also be on the receiving end of any number of court cases and regulatory hearings that seem to always take place against financial companies.
Despite that gigantic list of risks that American Express could face, I believe that this company is more than investable. You’ll be receiving a dividend the entire time and I think that the stock should be trading around $90 by 2015.
Revenues over the next five years will definitely be pushing $40B per year and there is lots of room for that to expand if AmEx decides to go after Visa and MasterCard more aggressively.
Net income will also continue to grow into the foreseeable future as more people around the world begin picking up an AmEx card for their exclusive member benefits.
Ash1402 owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and MasterCard. Motley Fool newsletter services recommend American Express Company, Berkshire Hathaway, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!