Is American Express a Risky Investment?

With shares of American Express Company (NYSE:AXP) trading at around $67.75, is AXP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock's Movement

Who wants to read long paragraphs? Readers want facts. They want to get in and out as quickly as possible. At least in this case, your wish has been granted. Let's take a look at some positives and negatives for American Express.

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Positives:

Best valuation compared to peers 1.20 percent dividend yield (higher than peers) Members are often big spenders Analysts like the stock: 12 Buy, 12 Hold, 3 Sell New buyback program Global card spending increased 6 percent year-over-year Stable delinquency rates Lower salaries Decreased benefit expenses Decline in long-term debt to $56 billion from $59 billion Consistent revenue improvements on an annual basis Cash position increased to $28 billion from $22 billion Dividend hike of 15 percent

Negatives:

Didn't hold up as well as peers in 2008 Total expenses increased 1 percent year-over-year Increase in tax rate to 33 percent from 29 percent Earnings setback in 2012 ROE down to 23.3 percent from 27.1 percent Debt management still needs improvement

The chart below compares fundamentals for American Express, Mastercard Incorporated (NYSE:MA), and Visa Inc. (NYSE:V). American Express has a market cap of $74.39 billion, Mastercard has a market cap of $65.72 billion, and Visa has a market cap of $110.61 billion.

	AXP	MA	V
Trailing   P/E	17.10	24.40	46.52
Forward   P/E	12.88	17.72	19.67
Profit   Margin	15.12%	37.33%	22.46%
ROE	23.16%	43.07%	8.77%
Operating   Cash Flow	N/A	$2.95 Billion	$899.00 Million
Dividend   Yield	1.20%	0.40%	0.80%
Short   Position	1.40%	N/A	1.30%

 

Let's take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for American Express is close to the industry average of 3.40, but saying American Express has shown quality debt management would be a downright lie. At least the company is heading in the right direction in this regard.

	Debt-To-Equity	Cash	Long-Term Debt
AXP	3.11	$28.00 Billion	$59.00 Billion
MA	0.07	$5.04 Billion	$51.00 Million
V	0.00	$2.78 Billion	$0

 

T = Technicals Have Strong  

American Express has outperformed Mastercard and Visa year-to-date, but it has underperformed its peers over a three-year time frame. American Express offers the highest yield of the three (see chart in Catalyst section).

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	1 Month	Year-To-Date	1 Year	3 Year
AXP	1.19%	18.63%	14.11%	54.86%
MA	-0.39%	9.15%	17.42%	111.80%
V	-0.85%	10.56%	36.48%	84.10%

 

At $67.75, American Express is trading above all its averages.

50-Day   SMA	65.03
100-Day   SMA	61.98
200-Day   SMA	59.50

 

E = Earnings Have Suffered a Setback             

Earnings had been improving on an annual basis since 2010, but there was a setback in 2012. However, revenue has climbed for three consecutive years.

	2008	2009	2010	2011	2012
Revenue   ($)in   billions	28.36	24.52	27.58	29.96	31.58
Diluted   EPS ($)	2.32	1.54	3.35	4.12	3.89

 

When we look at the previous quarter on a year-over-year basis, we see an improvement in revenue and earnings.

	3/2012	6/2012	9/2012	12/2012	3/2013
Revenue   ($)in   billions	7.61	7.97	7.86	8.14	7.88
Diluted   EPS ($)	1.07	1.15	1.09	0.57	1.15

 

Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

American Express should hold up better than its peers during difficult economic times, right? This is true, but only as long as the stock market and real estate market hold up. If one or both markets are to fall, then American Express clients will take the biggest hit due to heavy investment losses. Therefore, contrary to popular belief, American Express isn't the safest option in the industry if we see a bear market. As for right now, it's the perfect environment for American Express.

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Conclusion

American Express has performed well for several years, and the stock is still trading at a good value. However, it has underperformed its peers over the past several years, and debt and lack of resiliency are concerns.