Using ROIC To Value American Express AXP

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

Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference

Stephen SchwarzmanThe following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More


 

Previous articleCash Banned, Freedom Gone
Next articleIs Apple About To Get Rid Of Its Iconic Plastic Bags?
Please note that I do not read comments posted here, nor respond to messages here. I don't have the time. If you want my attention, you must seek it directly at my blog. Aswath Damodaran is the Kerschner Family Chair Professor of Finance at the Stern School of Business at New York University. He teaches the corporate finance and equity valuation courses in the MBA program. He received his MBA and Ph.D from the University of California at Los Angeles. His research interests lie in valuation, portfolio management and applied corporate finance. He has written three books on equity valuation (Damodaran on Valuation, Investment Valuation, The Dark Side of Valuation) and two on corporate finance (Corporate Finance: Theory and Practice, Applied Corporate Finance: A User’s Manual). He has co-edited a book on investment management with Peter Bernstein (Investment Management) and has a book on investment philosophies (Investment Philosophies). His newest book on portfolio management is titled Investment Fables and was released in 2004. His latest book is on the relationship between risk and value, and takes a big picture view of how businesses should deal with risk, and was published in 2007. He was a visiting lecturer at the University of California, Berkeley, from 1984 to 1986, where he received the Earl Cheit Outstanding Teaching Award in 1985. He has been at NYU since 1986, received the Stern School of Business Excellence in Teaching Award (awarded by the graduating class) in 1988, 1991, 1992, 1999, 2001, 2007, 2008 and 2009, and was the youngest winner of the University-wide Distinguished Teaching Award (in 1990). He was profiled in Business Week as one of the top twelve business school professors in the United States in 1994.