American Express (NYSE:AXP): Playing cards with Wal-Mart (NYSE:WMT)

American Express Co. currently trades at a higher Price/Book ratio (3.4) than its peer median (2.2).

AXP-US outperforms its peers with a relatively high operating performance and the market also expects faster growth relative to its peers

AXP-US’s median net profit margins and relatively high capital efficiency give it some operating leverage.

The company’s year-on-year change in revenues and earnings are better than the median among its peer group.

AXP-US’s return on equity currently and over the past five years suggest that its relatively high operating returns are sustainable.

While AXP-US’s revenues have increased slower than peer median, the market currently gives the company a higher than peer median PE ratio and may be factoring in some sort of a strategic play.

The company’s level of equity capital investment suggests it might be under-investing in a business with above median returns.

Price/Book or P/B valuation is a function of the observed operating performance of the company as measured by ROE multiplied by the market’s current implied growth expectation as measured by the P/E. We define Valuation Premium as the difference between the Market Capitalization and Book Value of Equity, and as a proxy for the NPV of cash-flow associated to the Book Equity investment.

Based on the analysis of the relative contribution to the P/B valuation of “Operations ROE” vs. “Expectations P/E”, we quickly garner insight into peers comparative performance and the market’s assessment of their strategies – are they just “Harvesting” the current business pipeline or are investors betting on a strategic “Turnaround”?

AXP-US achieved a better operating performance than the median of its chosen peers (ROE of 26.7% compared to the peer median ROE of 9.5%) and the market still expects faster growth from it than from those peers (PE of 13.7 compared to peer median of 10.1). The company currently trades at a higher Price/Book ratio of 3.4 compared to its peer median of 2.2.

AXP-US’s ROE is similar to its five-year average ROE of 26.5%. The decrease in its ROE to 26.7% from 27.6% (in 2011) was also accompanied by a decrease in its peer median during this period to 9.5% from 14.2%. Relative to peers, ROE rose 3.7 percentage points.

AXP-US’s current PE is similar to its average year-end PE of 13.8 over the last five year-ends. PE increased to 13.7 from 11.3 (at recent year-end 2011) unlike its peer median, which decreased during this period to 10.1 from 11.3. Combining both ROE and PE suggests that AXP-US’s current PB (price/book) of 3.4 is similar to its average year-end PB of 3.3 over the last five year-ends.

The company’s median net profit margins of 15.1% and relative capital efficiency (capital turns i.e.revenue/equity of 1.8x compared to peer median of 0.5x) give it some operating leverage.

AXP-US’s net margin is its highest relative to the last five years and compares to a low of 8.0% in 2009. Though its net margin has remained relatively stable at 15.1% compared to 2011, its peer median has decreased to 16.4% from 20.3% during this period. Net margin rose 4.0 percentage points relative to peers.

AXP-US’s capital efficiency (revenues/equity) is its lowest relative to the last five years and compares to a high of 2.9 in 2007. Compared to 2011, capital efficiency has remained relatively stable for both the company (1.8) and the peer median (0.5).

The company enjoys both better than peer median annual revenue growth of 6.7% and better than peer median earnings growth performance 19.3%. AXP-US currently converts every 1% of change in annual revenue into 2.9% of change in annual reported earnings. We view this company as a leader among its peers.

While AXP-US’s revenues have increased more slowly than the peer median (0.4% vs. 12.0% respectively for the past three years), the market currently gives the company a higher than peer median PE ratio of 13.7. The stock price may be factoring in some sort of a strategic play.

American Express Co. is a global payments and travel company. The company, through its subsidiaries, offers products and services including charge and credit payment card products and travel-related services to consumers and businesses around the world. It focuses on generating alternative sources of revenue on a global basis in areas such as online and mobile payments and fee-based services. The various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations through various channels, including direct mail, online applications, targeted direct and third-party sales forces and direct response advertising. American Express operates through four reportable segments: U.S. Card Services, International Card Services, Global Commercial Services and Global Network & Merchant Services. The U.S. Card Services segment offers a wide range of card products and services to consumers and small businesses in the United States and provides travel services to card members and other customers. The International Card Services segment offers proprietary consumer and small business cards outside the United States. The Global Commercial Services segment provides expense management services to companies and organizations worldwide through its Global Corporate Payments and Global Business Travel businesses. Global Corporate Payments offers a range of expense management solutions to companies worldwide through its Corporate Card Programs and Business-to-Business Payment Solutions. Global Business Travel provides globally integrated solutions, both online and offline, as well as through mobile applications, to help organizations manage and optimize their travel investments and service their traveling employees. The Global Network & Merchant services segment operates a global payments network that processes and settles proprietary and non-proprietary card transactions. It also provides point-of-sale products, multi-channel marketing programs and capabilities, services and data, leveraging the global closed-loop network. The company was founded by Henry Wells, William G. Fargo and John Warren Butterfield on March 28, 1850 and is headquartered in New York, NY.

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