This week CapitalCube examines American Express Co. (NYSE:AXP) which has teamed up with Wal-Mart Stores Inc. (NYSE:WMT) to provide low-income shoppers with a pre-paid debit card called Bluebird. AXP stock gained 26 cents yesterday while WMT stock closed 12 cents higher.

wal-mart

CapitalCube analyzes American Express Co. (NYSE:AXP) relative to its peers which include: JPMorgan Chase & Co.(JPM), Visa Inc. (V), Citigroup Inc.(C), Bank of America Corp.(BAC), MasterCard Inc. Cl A (MA), Capital One Financial Corp. (COF), Discover Financial Services (DFS), and Cielo S/A (CIEL3). AXP stock scores 83 for its Fundamental Analysis relative to peers. For more on CapitalCube’s scoring system

AmericanExpress_NYSE_AXP_Stock_Score

Relative Valuation

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

Valuation Drivers

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

Operations Diagnostic

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

Earnings Leverage

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

Sustainability of Returns

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

Growth Expectations

Strategic Play
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.

Capital Investment Strategy

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

Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.

Share Price Performance

Relative underperformance over the last year and the last month suggest a lagging position.

AXP-US’s share price performance of 34.9% for the last 12 months is below its peer median. The 30-day trend in its share price performance of 2.4% is also below the peer median implying that the company’s stock performance is lagging its peers.
Stock price performance over the last month vs. last year charted with respect to peers for American Express Co. (NYSE:AXP)

Drivers of Valuation: Operations or Expectations?

Valuation (P/B) = Operating Advantage (ROE) * Growth Expectations (P/E)

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 has an Outperforming profile relative to peers.

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.
Drivers of Valuation: Operations or Expectations? Operating Advantage or ROE% vs. Growth Advantage or P/E for American Express Co. (NYSE:AXP)
AXP-US has moved to an Outperforming from a relatively high ROE profile at the recent year-end.

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.
Graph of ROE% on Common Equity showing Peer Median (TTM) for American Express Co. (NYSE:AXP)
Graph of Price to Earnings for American Express Co. (NYSE:AXP) showing Peer Median (TTM) for American Express Co. (NYSE:AXP)

Operations Diagnostic

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

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.
Asset Efficency or Sales/Total Assets vs. Net Margin% or NI/Sales with respect to peers for American Express Co. (NYSE:AXP)
AXP-US has moved to a relatively high capital efficiency from an Volume Driven profile at the recent year-end.

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).
Graph of Net Margin% showing Peer Median (TTM) for American Express Co. (NYSE:AXP)
Graph of Capital Efficiency (Revenues/Shareholder Equity) showing Peer Median for American Express Co. (NYSE:AXP)

Earnings Leverage

Year-on-year change in revenues and earnings are above the median among its peers.

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.
Earnings Leverage Earnings Growth % vs. Revenue Growth % charted with respect to peers for American Express Co. (NYSE:AXP)

Sustainability of Returns

AXP-US’s relative returns suggest sustainable outperformance.
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Growth Expectations

The stock price is likely factoring in some chance for a strategic play.

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

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