Led by growth in non-interest revenues such as discount fees, American Express’s revenue grew 3% in the second quarter of 2012 compared to a year ago. Net income was essentially unchanged, but a decrease in share count drove an increase in earnings per share from $1.10 to $1.15. The company’s numbers have been similarly good for the first half of the year- 1H 2011’s EPS were $2.07, and for the first half of this year EPS are $2.22. This represents a 7% growth rate, which while not sufficient to classify American Express as a growth stock at least indicates that the company is able to maintain its business and grow faster than inflation.
At its current valuation, that is all that American Express Company (NYSE:AXP) needs. The trailing price-to-earnings multiple of 13 and small dividend yield of 1.4% require very little growth to make the stock a good value, and on a historical basis the company has been able to achieve that despite concerns over low consumer spending and economic growth. It should be noted explicitly that the company has a policy of buying back shares, as was implied given the decrease in share count compared to last year; American Express has announced a policy by which it returns 50% of its return on capital to shareholders through either conventional channel of dividends and buybacks, and in the first half of 2012 buybacks consumed over four times as much cash as dividend payments. With a forward P/E of only 12, and this buyback program, the company needs to grow very little in order to hit analyst targets- and hitting those targets would make the current stock price undervalued.
Along with American Express’s brand, this valuation explains Berkshire Hathaway’s ownership of over 150 million shares of the company (find other positions reported by Berkshire Hathaway), a position that is unchanged over the last year. First Eagle Investment Management is another large investor in American Express, reporting 9.9 million shares in its portfolio at the end of June (research more of their favorite stocks). Adage Capital Management, run by Harvard Management alums Phil Gross and Robert Atchison, increased its position 53% in the second quarter to 1.5 million shares.
Credit card titans Mastercard (NYSE:MA) and Visa (NYSE:V) have more ambitious growth trajectories assigned to them by the Street. Their trailing P/Es are higher than those of American Express, but on a forward basis they narrow the gap: 16 for Mastercard, 18 for Visa. They are the market leaders, and of course they also occupy (smaller) positions in Berkshire Hathaway’s portfolio. Last quarter they did get better growth than American Express, with revenue about 10% higher than a year ago, so perhaps they can continue their rise on a sustained basis and close the multiple gap. We would also consider Discover Financial Services (NYSE:DFS) a peer. Discover is the other end of the spectrum: its earnings decreased in its most recent quarter compared to the same period in 2011, but its earnings multiples come in at 9 on a trailing basis and 10 based on forward estimates. We actually think that American Express Company (NYSE:AXP) serves as a happy medium on this continuum: we don’t worry about the stability of its business going forward as we do with Discover, and its valuation does not depend on strong growth as do Mastercard and Visa.
