Money Tree Portfolio: Investing in American Express (AXP)

By | April 3, 2013

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American Express, offers credit cards, travelers checks, gift cards, travel arrangement services, foreign exchange services, payment processing, and investment management services. Its customers range from consumers to large businesses and everything in between. American Express also publishes in a variety of lifestyle magazines. It’s main line of business, however, is credit cards.

 

 

 

american express image

Industry Research & Company Analysis: American Express competes with other companies in the financial services industry. A lot of these companies include banks, brokerages, and credit card companies. This industry is sensitive to the economy, but can bounce quickly out of recessions because of a variety of factors including government intervention (cheap money in the form of low interest rates). American express has a large brand awareness both domestically and globally, and is a global market leader in the credit card industry. This position brings many benefits as vendors readily accept American Express credit cards, and a lot of customers associate this company with reliability and security. American Express knows how to retain customers, with special perks and privileges  and so its customers are loyal. Because of it’s size, American Express also has cost advantages compared to other its competitors.

Recent Financials as % of Revenue

Historical Year Ended Millions USD
2007 2008 2009 2010 2011
Total Revenue 31,540 31,920 26,730 30,242 32,282
% growth rate n/a 1.20% -16.30% 13.10% 6.70%
COGS % of revenue 0.00% 0.00% 0.00% 0.00% 0.00%
Gross Profit 31,540 31,920 26,730 30,242 32,282
Gross Profit % of revenue 100.00% 100.00% 100.00% 100.00% 100.00%
Operating Expenses 25,846 28,339 23,889 24,278 25,326
Operating Expenses % of revenue 81.90% 88.80% 89.40% 80.30% 78.50%
SG & A 25,198 27,627 22,819 23,361 24,408
SG & A % of revenue 79.90% 86.60% 85.40% 77.20% 75.60%
EBITDA 6,342 4,293 3,911 6,881 7,874
EBITDA % of revenue 20.10% 13.40% 14.60% 22.80% 24.40%
Dep & Amor 648 712 1,070 917 918
Dep & Amor % of revenue 2.10% 2.20% 4.00% 3.00% 2.80%
EBIT 5,694 3,581 2,841 5,964 6,956
EBIT % of revenue 18.10% 11.20% 10.60% 19.70% 21.50%
Taxes 1,568 710 704 1,907 2,057
Taxes % of EBIT 27.50% 19.80% 24.80% 32.00% 29.60%
NOPAT 4,126 2,871 2,137 4,057 4,899
NOPAT % of revenue 13.10% 9.00% 8.00% 13.40% 15.20%

Key Ratios:

Market Cap (intraday)5: 73.18B
Enterprise Value (Apr 4, 2013)3: 114.50B
Trailing P/E (ttm, intraday): 17.03
Forward P/E (fye Dec 31, 2014)1: 12.43
PEG Ratio (5 yr expected)1: 1.14
Price/Sales (ttm): 2.52
Price/Book (mrq): 3.95
Enterprise Value/Revenue (ttm)3: 3.87
Enterprise Value/EBITDA (ttm)6: N/A

I like this business because there is a lot of growth potential as consumers shift away from cash to using credit cards as a more convenient way to pay for things. Also, since American Express collects a small % of the total bill spent, its revenues grows as prices increase. So in times of inflation, its earnings grow. If you are worried about inflation then investing in this stock is a great way to protect against that. With the development and in turn modernization of other countries, there is a lot of potential for growth and expansion for American Express. The economic recession of 2009, fragmented and reduced the size of the financial services sector, and this could lead to opportunities for further growth as the economy gets better.

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