American Express Making All the Right Moves
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Based on American Express’ (NYSE: AXP) credit card business alone there’s a lot to like about one of the industry’s leaders. As multiple economic indicators align – along with the restrictions on debit card fees – credit is making a serious comeback. But that’s not all American Express has going for it right now. A conservative valuation, diverse product lines and some interesting industry scuttlebutt add up to an intriguing investment opportunity.
On the heels of three straight years of top and bottom-line growth, American Express recently announced plans to institute a $5 billion stock buyback plan – nearly always a good sign management believes the company is undervalued relative to its peers. And a quick look at the valuations of American Express’ two primary competitors – Mastercard (NYSE: MA) and Visa (NYSE: V) – validates senior management’s line of reasoning. At nearly 29 and 31.45 times earnings, respectively, both are over twice AMEX’s 14.39 P/E. Even with a nice run up year-to-date American Express stock remains a relative value.
Of course AMEX is more than just a credit card company. As markets – and subsequently trading – improve the company’s financial planning and services lines should add to the bottom-line.
And let’s not forget some of the recent moves American Express has executed – one of which may help the company unlock additional value sooner as opposed to later. In 2011 AMEX purchased Lianlian Group – a PayPal like service that operates throughout China. They proceeded to license additional technology that expands the service beyond purchasing mobile minutes. Now users are able to utilize Lianlian to buy any number of items via mobile computing devices. And here’s where it gets interesting.
According to James Friedman – an analyst with Susquehanna Financial – there are rumors of an IPO in the not-too-distant future. Should this come to pass, Mr. Friedman’s of the mind a public offering could unlock as much as $1.50 per share for stockholders. With trailing earnings of just over $4 a share that would be significant, to say the least.
While less impactful in the near term than Lianlian, American Express’ foray into the Groupon-like business with the company’s Loyalty Partners program is another potentially under valued asset. Analysts have suggested as much as $2 a share or more in value to shareholders. And let’s not forget the recent announcement of a partnership between AMEX and Twitter. The agreement provides cardholders with a chance to receive couponless savings directly onto their cards - if they spread the good word via their Twitter accounts that is.
There are simply too many positive considerations for American Express to meander at 14 or 15 times earnings. And the fact management isn’t sitting on their hands – but actively pursuing opportunities to unlock shareholder value (stock buybacks, potential IPO’s, marketing partnerships, etc) – should give potential investors even more confidence.
If you’ve got a few months, you could do a lot worse than getting on board the AMEX train. The company isn’t standing on its laurels, and the moves they're making appear to be spot on.
Motley Fool newsletter services recommend American Express Company and Visa. The Motley Fool owns shares of MasterCard. timbrugger has no positions in the stocks mentioned above. 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.
