Using ROIC To Value American Express AXP

0:00welcome everyone to our webinar on how to boost american express is valued by
0:06fifty billion this webinar built on a series of webinars and reports that
0:13we’ve written and edited of return on invested capital
0:18i’m david trainer CEO constructs and return on invested capital is our single
0:24most important metric new constructs there are many important but the most
0:29important is returning the best to cap and XIV our webinar our return on
0:36invested capital click here are hand out the setup will be available anywhere but
0:42are you watching this is a replay will be available we will set out to all
0:46attendees log but the takeaway is that return on invested capital is the single
0:55best measure profitability is the one version of the truth when it comes to
1:00drop the concept is very straightforward one of the cash flows the company
1:05generates relative to the capital in the business cycle concept simple
1:10calculation very difficult to get the data very difficult to get the data
1:14right to lots of companies when it comes to american express what we show is that
1:20as american express looks to innovate its business and this is a different
1:24situation than with the takeaway is that management tax the best interests of
1:35shareholders may need to focus on return management does focus the deuce the
1:43market value american express by seventeen 250 billion a lot in the first
1:50ride around around
1:52investigator also means letting their performance compensation around return
1:57on invested capital I think Valley is an excellent example where executives
2:03performance benchmarks for metrics that are not allowed creates a misalignment
2:10of it grows
2:12and when you’re paying people for things that don’t create your value your
2:18tracking people they don’t care about you so it should come as no big surprise
2:23that executive teen turned out to be a little less than what one might desire
2:31in terms of working out to shareholders and instead cells we live in a
2:37capitalist world you make it easy for people to make money while you lose
2:41money don’t be surprised if that’s what they do and the way to make sure that
2:46management teams are gonna make money when investors is to focus on return on
2:52invested capital now our thesis and our belief capitals predicated on the idea
3:00that cash flow matters and superior probabilities
3:04there may be times in the market when stocks are incorrect but I can tell you
3:15that our track record can speak to the fact that while the market’s appetite
3:22for rationality by be limitless investors appetite for risk is not limit
3:28you care about risk care about the kind of work do come back to you because our
3:35market cannot be successful by allocates capital to businesses the doc is
3:41successful capital those that do so the crux of a lot of our analysis is this
3:51regression and else where we show our I see how much what is a valuation is
3:58return on invested capital regressed against enterprise by divided by
4:03investing cap it’s a fancy much more sophisticated her price-to-book big
4:10takeaway here seventy-two percent 72 percent of the changes in valuation
4:15american express its peers
4:19can be explained by changes in return on invested capital that’s a really high
4:23number it’s just about as high for the entire recipe by punk you’re 26 percent
4:31for large cat Financial’s 69% the purpose of these lies to show you that
4:36we do this work just in isolation wouldn’t do for just a few companies
4:404,000 3,000 probably at 67 10,000 by the end of the year
4:47the point is providing our clients a framework on a platform for
4:52understanding the true value true probability that we’re able to allow you
4:57to feel free to share responsibilities and make more informed decisions
5:03less risk in other words we help you transcendence two ways
5:13dissipated investors know that cell SCI recommendations that entertainers such
5:19as the one we see on the screen here
5:21kramer are not necessarily in the business of informing people the truth
5:27there in the business of making themselves and we’ve got plenty of
5:32webinars as well as articles that point out that sell-side recommendations
5:39sell-side analysis of earnings are not reliable but is always come from the
5:46personal capital markets to allocate capital to its most efficient what does
5:50that mean that means that we believe that markets are efficient when they
5:56help investors identify which companies are the best at the Capitol right and we
6:03believe that when markets are efficient standards of living are better so we say
6:12therefore believes that means we focus entirely on understanding cash flow
6:16which focused on the relationship between return on invested capital stock
6:20valuation because we think it’s into it
6:24regression analysis make sets the market
6:27reward valuation those businesses make the most money relative to the capital
6:34into that american express and focus on that then that’s what management Dr
6:40store they can see returns of capital or at least minimize the decline and return
6:45of capital is back in stock prices and drive improvements that’s we focus on
6:58is that look at five different scenario if the capital american express be
7:18maintained at 20% implied stock price is not a box for secrecy game which is
7:24about thirty three point six billion work they can keep our way see it
7:31seventeen percent to 17.7 billion dollar J 2221 in 15 the other scenarios let’s
7:39talk about this year so here’s a question as
7:49or so what does it mean when I didn’t earn that right
7:52stock is worth four bucks a share in american express can maintain its
7:56current Ric of 20% that means it goes from below the line to the line that
8:03enterprise guys invested capital ratio would imply a $94 stock price 350 right
8:10so right now its trading below the line it’s below the trendline it’s up to the
8:15light it’s probably not the other way to express this way
8:22have a lower Ric our model says it will meet the need to travel I’d with a 14
8:29percent return on invested capital you can interpret the model here serving as
8:34the market expectation is that american express his return on invested capital
8:39but big takeaway here is that the strong correlation between domestic capital
8:49market valuation shows that there’s big upside for shareholders market is
8:55focused boosting ROIC now we point out that this focus is not necessarily easy
9:01thing he said about work
9:03there’s a lot of pressure the marketplace to listen to the crazies
9:07I mean right to listen to the Nordics to focus on growing unease and anyone who
9:14watched are all women are the same topic we should you quite specific quite
9:21specifically we show that work was focused on growing earnings per share in
9:28the share capital in jail followed by see earnings per share and we see a
9:41single thing with with American Express was very impressed by it as the capital
9:45of seats were correlated is well with return of capital except you recently
9:50with the valuation is quite low correlation and what’s that telling you
10:01seem like the markets no longer believe in the senate sustainability of american
10:05express our I see a lot of reasons to be concerned the Costco account JetBlue as
10:11well I
10:13discrimination provisions in contracts with merchants right american express is
10:21charged to merchants extra they’ll like that so management does follow our way
10:31see what I need to do to convince the market they’re they’re doing is gonna
10:35stick to start with leadership right folks already start stop stop losses and
10:42backup plan that it’s hard to believe that everyone else has to be tightly
10:46capital budgeting every capital allocation decision needs to pass the
10:50NPV test which measures weather greeted the cost you also get a time to
10:57compensation right I said the ballot as a single lot of our danger zone stocks
11:02based on GAAP earnings are going to grow earnings guess what not get burnings
11:09does not do for you it’s just not create your balanced approach example of the
11:17dangers on stocks we pointed out and it says blown up and then communications
11:22last part why do you think we gave we publish this is an open letter to do is
11:29take this letter within 21 days roadshows tension all the same day take
11:34this report with it I wrote shows this is what we do it we’re going to prove
11:41our return on invested capital that’s going to lead to contribute more money
11:49in your pocket so tired of proposals these polls any proposal any strategies
11:57to really do three things it can increase business is going to extend our
12:04growth appreciation or widen our remote right is going to allow us to maintain
12:09high returns on capital
12:10all right to hear increasing capital retain the return of capital and a
12:15higher level for walker or your gonna grow revenue last I got this question
12:21earlier you know why
12:26the company’s our way back but not all revenue growth this makes a not all
12:33revenue growth is good revenue growth is only good capitalists so we talk about
12:44specific proposals about them in general and specific scenario why
12:51expressed this price such a significant decline in profitability guy I think
12:56trying to lessen the market expects so about 40 percent drop in revenue with no
13:02change in return of capital I’m sorry morning to get american express a
13:07seventy percent return on capital increase its value by 1878 to the
13:19current one billion dollar cost-cutting plan would increase the nobel margin in
13:22nineteen percent cappuccino remains the same way that would imply a 22% that 200
13:33basis point improvement in Ric
13:35increase american forces market I 4703 innovation strategy but soon american
13:53express invested five billion fund by diet get an innovation that results in
13:5810 percent revenue growth growth in an overall margin improvement based
14:04rises 21.0% margins would get 20% RYC to 21% these improvements try to play stock
14:16price of $113 share or $1 $1,000,000,000 increasing now faces a general term and
14:26we’re not here to really do the job because he’s always always get my text
14:34dude dropped a decrease in cost is that we give investors managers everybody
14:48everyone the framework for understanding exactly what the impact of the strategic
14:55consulting offering strategic decision makes on valuation whatever it is they
15:02need to do to achieve cost more to achieve the success as an ambassador
15:10leave that to other folks to figure out a way around that by itself we don’t
15:16want to do this scenario for we analyze the impact of it and innovation efforts
15:21that are not going to assume that the company can maintain 20 percent or so we
15:31give them credit for saying you know what we’re gonna we’re not going to see
15:34that dropped 20% our way see the darker business days to say and they invest ten
15:42billion debt renovation and increase revenue by 5%
15:47Morgan State saying that the cattle terms of lower 22.98 what always see
15:53cost fifty percent of nobel prize fighters of 275 million profit
16:03divide by the ten billion dollar investment return on capital just 3%
16:07this means the american express his overall return on capital by 50 basis
16:17points to you for even the profits grow sure that I will be less and here’s a
16:31summary sustained
16:33scenarios while 23 I’m noticing scenario for the last value creation that he just
16:40stay because you’re making an investment in revenue which you’re lowering the
16:46efficiency that lowering the rates for american express by making an investment
16:53that focuses on the top line not the real that’s kind of the big takeaway
16:58more details on the rest of the report
17:02gonna take some questions now there will be done quickly first question can now
17:08see any company under-covered yes we’re going to continue to roll out more and
17:14he’s working on another large financial services for as we speak next week
17:23widely used two reasons why it’s
17:34able to do right takes a lot of work and we have actually a paper on this or why
17:41she is so great why don’t more people use it to check that out it goes to a
17:47lot of reasons but the main reason is that it’s difficult to do and the end of
17:55the day
17:56Wall Street analysts and we are all honesty general
18:00want there to be one version of the truth because that’s what it means to be
18:05what it means to do research so it’s really not
18:13kramer or any of the sort of insiders best version of its capitol building
18:20focus because this framework i think is pretty obvious its intuitive and it
18:25really cuts out a lot of noise that tends to drive the dialogue are there
18:32any companies currently focusing on Norway’s sees we propose there are a few
18:36we’ve written about autozone is one we’re in a log idea for a long time to
18:42drill there are others who is in the foreseeable future
18:46can you think of the Delta between twenty and twenty percent are always has
18:51a margin of safety
18:53yeah you could possibly think about that right is that the current stock price
18:56already implies so they do anything better than that you can see the stock
19:00portfolio you really want you still want management IC headed down it may be too
19:09many ways this is increasingly they’re gonna have to do something they have to
19:19do something to maintain profitability we see how do we foresee a large adopted
19:28or ICU or will it remain a great question you know we don’t know where we
19:38we used in many ways a lot the accessibility of ROIC because
19:46work and making it more readily available to people and making available
19:52was stable and the fact that we can do this now so the S&P 500 fly on my
20:00website be quickly so really you know I think that we’re in a world where
20:05investors care more about the truth about risk and it’s in their best
20:09interests understand ROTC but predicting when actually going to happen in mass I
20:15thought it was gonna happen along time ago that brought some record I guess I
20:19got one last question and then we will move on life is good will remove from
20:24incoming retained is invested capital yes and no you wanna know exactly how we
20:30calculate our site so going to concerts on education and you can see definition
20:46for charter capital you can see the definition porno para esta capital that
20:52make up to capitol you can see all the adjustments we made to get no patent
21:01invested capital artist gotta cash flow right these are all free we like to be
21:08very transparent new constructs because we know how much work we doing what you
21:15know how much work we do forty I don’t worry about somebody copying my formula
21:20to return a message you will use it is just make sure you understand that you
21:27need to write data to drive at 490 one thing’s for sure you’re not going to do
21:34this can we do it because we’ve invested a decade of dollars technology to do
21:38this with integrity that’s what makes it better collecting data because we used
21:45it better modeling data because we collected our competitors collection
21:51sign but typically using data entry specialist third-world countries that
21:56don’t know the difference
21:58correct line item arrived just collecting data they never seen a model
22:03that will our research competitors are using data from these data collection
22:09specialist Irish competitors many of which have not looked at actual 10 K
22:15and who knows ever to twenty years we look at the case and we think that makes
22:22a special focus on being the best thank you for your time please feel free to
22:31contact us at Twitter at new constructs Facebook constructs you wrote in the
22:40email me research a new contract dot com Watch more webinars we’ve got a whole
22:46bunch of webinars here on the site as well very transparent when should
22:51understand how much work we do to you thank you for joining us today

 

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