Market Chasers

5 Part Diversity Series: #1 American Express (AXP)

July 14, 2008 – 4:21 pm

The next 5 articles posted will be a 5 part series for a diversified portfolio. Here is part 1. I hope you enjoy the write and please stayed tuned for the articles to come.

Article notes

-Aimed towards small business

-Strong financial leverage

-Excellent CEO and marketing tactics

For this article, I have chosen American Express(AXP), which is my favorite credit card company on this planet. When Visa went public, I hopped on the bandwagon and sold off my position for a nice 40% gain in less than two months. American Express though, is the best long term credit card company play that is available. Financials in general will be the best money making play you can make once the credit crisis is fixed. Why might you ask that I pick this company? I bet you are asking that question right now to yourself, wondering as you look into your wallet at your Visa(V) or Mastercard(MA). Does this guy really know what he is talking about?

The answer is very simple and you have to look at it in a very broad sense. The reason why many people do not own American Express consumer cards is because there are not very many available. With Visa’s “accepted everywhere” slogan and Mastercard’s “Priceless” commercials, its very easy to see how this company has been flying under the radar. With American Express accounting for only 13% of the total cards issued in this country, it is easy to see why you may be confused as to why I am making this suggestion. With only 13% that doesn’t mean anything and that is because of the marketing tactic that this company uses. American Express targets small business which includes only proprietorships and partnerships. In 1995, small businesses accounted for approximately 80% of the businesses in this country and today, that number is over 90%. KNOCK KNOCK, HELLO?! MCFLY?! Got to love the Back to the Future movie reference but, this is an absolutely astonishing number and with American Express targeting these types of businesses with cards such as the Plum Card, it is a awesome tactic by the board of directors and employees. Just think about that for a moment. When you are driving down the road, 9 out of the 10 businesses you see are not corporations and are run by people like you. This is the single reason why I absolutely love this company and its CEO Ken Chenault. I believe he is one of the best CEOs that this country has and runs American Express through this business world I refer to as the gauntlet. Thought American Express commercials may not be the most sex appealing commercial on T.V., an investor must realize that there are two halves to the cookie: the consumer and the investor. You are the investor.

Even with all this in mind, American Express also has a very nice set of financials. The single most shocking number I calculated was the financial leverage ratio. American Express had a financial leverage ratio of 13.585 at the end 2007 compared to Mastercard with one just above two. I mean…are you kidding? Talk about the ROE potential here. American Express also has about 11 billion in free cash floating around, about 40 percent more than Visa and almost seven times the amount Mastercard has. The balance sheet is clean and the statement of cash flows is everything we want to see in a growing company: positive operating flow, negative investing flow and positive financing flow. American Express also had a 36.3% ROE ratio for 2007 compared to mastercard with a 35.8% ROE. We have run into a dilemma here. A higher ROE and a high financial leverage ratio compared to a lower ROE and a lower financial leverage ratio? This just does not make sense. People are telling me to buy Mastercard over American Express?

American Express closed this afternoon down 4.34% to 37.31 and is trading at 11.33x forward earnings based on consensus earnings estimates compared to Mastercard who closed today at 257.50 and is trading at 29.2x forward earnings. In my opinion, Mastercard is due for a correction as its P/E continues to rise. This stock is too cheap. I believe now is a great time to buy American Express but I believe it can drop into the 32-35 range due to the economic slowdown, which will effect consumer spending at these small businesses as well as earnings for the company. You can place limits at these prices if you wish but even at 37, this is still a great bargain. The stock is currently trading 28 points off of its 52 week high which is an absolute shot to the groin if you know what I mean. I currently do not own any stock in this company, but will inform subscribers as well as the rest of this site once I pull the trigger, which will be very soon. I thank you for taking the time to read this article as well as visiting Marketchasers.

-Justin Moon, Senior Writer for Marketchasers.com