Between American Express, Visa, and Mastercard, there is no doubt that American Express has the worst growth characteristics of the three. Visa has been busy penetrating the European markets to keep its trajectory of 13% annual growth in line, and Mastercard stays a close second with its trajectory of 10-12% earnings growth. Both of these credit-oriented corporations are likely to have long-term earnings growth that is doubled what you will see from the S&P 500.
And then there is American Express. For the next five years, it is only expected to grow earnings in the 5-7% range. Its growth is not nearly as attractive as Visa and Mastercard.
And yet, it has been the focus of my attention this year because of its dirt-cheap valuation. On January 22nd, I wrote “Classic Value Investing Right Now: American Express Stock At $55.” The reason why it caught my attention is because people were too pessimistic about the loss of the Costco deal. Yes, it meant that American Express would tread water with earnings for two years or so, but eventually, moderately higher profits would lay ahead.
At the time the stock fell to $55, it was still earning $5.50 per share in profits. That was a P/E ratio of only 10. It was basically battered down to its 2008 level valuation (though not as cheap as the lows of 2009).
Since then, American Express has returned 31% annualized while the S&P 500 has returned 18% annualized, while Mastercard has returned 24% annualized and Visa has returned 17% annualized. To a lot of people, it would not have been intuitive that American Express stock would go on to outperform its credit card peers or the S&P 500 over hardly any month-long time frame.
It is still a little bit undervalued–I would say American Express is worth somewhere around $75 per share–but a good chunk of the cheapness has been recovered this year.
This is why I get excited by the Viacoms, IBMs, and BPs of the investment world. It’s not that they have the superior characteristics in their industry, but they catch my attention because they are trading at deep value levels as they address solvable issues that they need to work through. It is also why I am frustrated that things like auto-purchasing through index funds has prevented a stock like Exxon from joining this deep value list.
American Express is not something that would have a spot on my “own forever” list. If it rose to the $80s quickly, I would strongly consider selling because it that point you’re only going to get 5-7% earnings growth thereafter with a miniscule dividend. American Express is a superior holding to the extent that you get to capture both P/E expansion and a bit of earnings growth. When you only get to capture the latter, it loses its edge.