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

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