Thematic evaluation
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American Express Co. (AXP)

October 17, 2024

Compared to: Capital One Financial Corp. (COF) | Visa, Inc. (V) | Financial Select Sector SPDR Fund (XLF)

Our reasoning

American Express is slightly overvalued due to its current valuation multiples being higher than historical and industry averages, despite strong financial performance. While the company's premium brand, strong market position, and growth prospects justify a premium valuation, the current price appears to be pricing in an optimistic scenario, leaving limited room for upside and not fully accounting for potential risks such as regulatory pressures and macroeconomic uncertainties.

Key takeaways
  • American Express is a financially strong company with a strong brand, premium customer base, and a history of successful execution.
  • The company has a strong track record of revenue growth, profitability, and cash flow generation.
  • AXP faces significant risks, including macroeconomic uncertainty, competition, regulatory pressures, and operational risks.
  • The company's valuation is currently at a premium, reflecting its strong financial performance and growth prospects.
  • AXP's future outlook is positive, with continued revenue growth, profitability, and expansion into new markets expected.
  • AXP's investment profile is characterized by strong financial performance, growth potential, and a premium valuation, but also by significant risks.
  • AXP's strong financial performance, growth opportunities, and premium valuation make it an attractive investment option for investors who are willing to accept a higher level of risk.
  • However, investors should carefully consider the company's significant risks, including macroeconomic uncertainty, competition, regulatory pressures, and operational risks.
  • AXP's future performance will depend on its ability to navigate these risks and continue to execute on its strategic initiatives.
Overvalued
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Evaluation summary

  1. Company Overview:

    • American Express Co. (AXP) is a globally integrated payments company that provides credit and charge card products, as well as travel and lifestyle-related services, to consumers, small businesses, mid-sized companies, and large corporations around the world.
    • AXP's principal products and services include credit/charge cards, merchant acquisition and processing, network services, loyalty programs, expense management tools, and travel services.
    • The company operates through four reportable segments: U.S. Consumer Services, Commercial Services, International Card Services, and Global Merchant and Network Services.
    • AXP competes in the global payments industry with card networks, issuers, acquirers, as well as evolving alternative payment and financing providers.
    • We are using the Financial Select Sector SPDR Fund (XLF) as a benchmark for AXP's price performance and comparing it to industry peers Capital One Financial Corp. (COF) and Visa, Inc. (V).

  2. Financial Performance:

    • AXP has consistently demonstrated strong revenue growth, driven by its premium customer base and expansion into new markets.
    • Revenue growth has outpaced the industry average, with a 9% year-over-year increase in Q2 2024.
    • AXP is highly profitable, with a net profit margin of 16.26% in Q2 2024, significantly higher than the industry average.
    • The company's profitability is further evidenced by its EBITDA margin of 30.36% in Q2 2024, exceeding the industry average.
    • AXP's ROA, ROE, and ROIC are all significantly higher than the industry average, indicating efficient asset utilization and strong profitability.
    • Compared to its peers, AXP has consistently outperformed both COF and V in terms of revenue growth, profitability, and return on equity.

  3. Operational Efficiency:

    • AXP maintains a strong liquidity position, with a current ratio of 2.82 and a quick ratio of 2.55 in Q2 2024, exceeding the industry average.
    • The company's working capital management is efficient, with a positive trend in changes in working capital over the past four quarters.
    • AXP generates strong cash flow from operations, with Funds from Operations increasing consistently over the past four quarters.
    • The company's free cash flow to equity has also been increasing, indicating strong financial flexibility.
    • AXP's asset quality is generally good, with a low level of nonperforming loans and a stable trend in goodwill and intangibles.
    • The company's capital expenditure has been relatively stable, with a slight increase in Q2 2024.
    • AXP has a sustainable dividend and share repurchase program, with a consistent dividend payout and a history of share repurchases.
    • Compared to its peers, AXP has a higher current ratio and quick ratio, indicating stronger short-term liquidity.
    • AXP's debt-to-equity ratio is significantly higher than its peers, indicating a higher level of leverage.

  4. Growth Opportunities:

    • AXP is expanding its market reach through geographic expansion, particularly in international markets, where it has seen strong growth in recent quarters.
    • The company is actively pursuing M&A opportunities, as evidenced by the recent acquisition of Tock and Rooam, which will expand its dining portfolio and digital offerings.
    • AXP is investing in R&D to develop new products and services, including a refresh of its US consumer Gold card.
    • The company's strategic focus areas include expanding its digital offerings, enhancing its membership model, and investing in marketing to gain share and sustain growth momentum.
    • AXP's management has a history of successfully executing strategic plans, as evidenced by the company's consistent financial performance and market share growth.

  5. Risks and Threats:

    • AXP faces significant risks, including macroeconomic uncertainty, intense competition in the payments industry, regulatory pressures on pricing and practices, and heightened operational risks, including cybersecurity threats and ongoing legal/regulatory challenges.
    • The company's exposure to macroeconomic conditions could impact consumer and business spending, credit performance, and liquidity.
    • AXP's reliance on key business partnerships and cobrand relationships poses a risk of loss or renegotiation.
    • The company faces ongoing legal proceedings related to merchant antitrust claims and governmental investigations into its historical sales practices.
    • AXP's operations are subject to evolving and comprehensive government regulation and supervision, which could materially affect its financial condition and results of operations.

  6. Valuation Analysis:

    • AXP's valuation metrics, such as P/E and EV/EBITDA, are currently higher than the industry average, reflecting the company's strong financial performance and growth prospects.
    • Compared to its peers, AXP's valuation is higher, indicating a premium valuation due to its strong brand, premium customer base, and growth potential.
    • Potential catalysts for AXP's valuation include continued revenue growth, expansion into new markets, and successful execution of its strategic initiatives.

  7. Price Performance:

    • AXP's stock price has consistently outperformed XLF over various periods, including YTD, 1-year, 2-year, and 3-year periods.
    • AXP's price performance has been more volatile than XLF, with periods of outperformance followed by periods of underperformance.
    • Compared to its peers, AXP has consistently outperformed both COF and V over all the periods analyzed.
    • AXP's beta is higher than XLF's, indicating that it is more sensitive to market movements.

  8. Future Outlook:

    • AXP's management has raised its full-year EPS guidance to $13.30 to $13.80, indicating confidence in the company's continued strong performance.
    • Analyst estimates for AXP's future earnings growth are generally positive, with a consensus expectation of continued strong performance.
    • AXP's future outlook is positive, with continued revenue growth, profitability, and expansion into new markets expected.

  9. Summary:

    • AXP is a financially strong company with a strong brand, premium customer base, and a history of successful execution.
    • The company has a strong track record of revenue growth, profitability, and cash flow generation.
    • AXP faces significant risks, including macroeconomic uncertainty, competition, regulatory pressures, and operational risks.
    • The company's valuation is currently at a premium, reflecting its strong financial performance and growth prospects.
    • AXP's future outlook is positive, with continued revenue growth, profitability, and expansion into new markets expected.
    • AXP's investment profile is characterized by strong financial performance, growth potential, and a premium valuation, but also by significant risks.
Peer fundamentals 
Fundamentals
Insights
  • AXP is experiencing strong revenue growth, driven by its premium customer base and its expansion into new markets.
  • AXP is highly profitable, as evidenced by the high net profit margin and EBITDA margin.
  • AXP has a strong liquidity position, as evidenced by the high current ratio and quick ratio.
  • AXP has a strong solvency position, as evidenced by the low debt-to-equity ratio and the high debt service coverage ratio.
  • AXP is effectively utilizing its assets to generate revenue, as evidenced by the high return on average assets and return on average total capital.
  • AXP is generating strong cash flow from operations, as evidenced by the increasing trend in Funds from Operations.
  • AXP has strong financial flexibility, as evidenced by the high debt service coverage ratio and the increasing trend in Free Cash Flow to Equity.
  • The decreasing trend in Net Goodwill could indicate that AXP is experiencing challenges with its acquisition strategy.
  • The decreasing trend in Net Operating Cash Flow and the decreasing cash flow to net income ratio are potential red flags.
  • AXP faces intensifying competition in the payments industry, regulatory pressures on pricing and practices, and heightened operational risks, including cybersecurity threats and ongoing legal/regulatory challenges.
  • AXP is likely to continue to experience strong revenue growth and profitability in the future.
  • The company's financial position gives it the flexibility to pursue growth opportunities, such as acquisitions or new product launches.
  • AXP's announced strategic initiatives, such as the acquisition of Tock and Rooam, are likely to have a positive impact on future earnings and cash flows.
Analysis
  • Revenue - AXP is experiencing strong revenue growth, driven by its premium customer base and its expansion into new markets. - The company's revenue growth is outpacing the industry average. - The revenue growth is sustainable, as evidenced by the consistently increasing growth rates over the 5-year period.
    • Profitability
      • AXP is highly profitable, as evidenced by the high net profit margin and EBITDA margin.
      • The company's profitability is significantly greater than the industry average.
      • The profitability ratios are increasing, which suggests that AXP is effectively controlling its expenses and increasing its profitability.
    • Liquidity
      • AXP has a strong liquidity position, as evidenced by the high current ratio and quick ratio.
      • The company's liquidity is significantly greater than the industry average.
      • The liquidity ratios are increasing, which suggests that AXP is effectively managing its working capital.
    • Solvency
      • AXP has a strong solvency position, as evidenced by the low debt-to-equity ratio and the high debt service coverage ratio.
      • The company's solvency is significantly greater than the industry average.
      • The solvency ratios are increasing, which suggests that AXP is effectively managing its debt burden.
    • Operational Efficiency
      • AXP is effectively utilizing its assets to generate revenue, as evidenced by the high return on average assets and return on average total capital.
      • The company's efficiency is significantly greater than the industry average.
      • The efficiency ratios are increasing, which suggests that AXP is improving its operational efficiency.
    • Cash Flow Analysis
      • AXP is generating strong cash flow from operations, as evidenced by the increasing trend in Funds from Operations.
      • The company's cash flow is significantly greater than the industry average.
      • The cash flow to net income ratio is decreasing, which could be a red flag.
      • AXP has strong financial flexibility, as evidenced by the high debt service coverage ratio and the increasing trend in Free Cash Flow to Equity.
    • Risk Factors
      • The decreasing trend in Net Goodwill could indicate that AXP is experiencing challenges with its acquisition strategy.
      • The decreasing trend in Net Operating Cash Flow and the decreasing cash flow to net income ratio are potential red flags.
      • The decreasing trend in Free Cash Flow Margin could be a red flag.
      • AXP faces intensifying competition in the payments industry, regulatory pressures on pricing and practices, and heightened operational risks, including cybersecurity threats and ongoing legal/regulatory challenges.
    • Future Outlook
      • AXP is likely to continue to experience strong revenue growth and profitability in the future.
      • The company's financial position gives it the flexibility to pursue growth opportunities, such as acquisitions or new product launches.
      • AXP's announced strategic initiatives, such as the acquisition of Tock and Rooam, are likely to have a positive impact on future earnings and cash flows.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-15)
Financial Select Sector SPDR Fund (XLF)
  • Performance Comparison: AXP has consistently outperformed XLF over various periods, including YTD, 1-year, 2-year, and 3-year periods. This suggests that AXP has been a stronger performer than the broader financial sector. However, it's important to note that AXP's performance has been more volatile, with periods of outperformance followed by periods of underperformance.
  • Risk and Return Analysis: AXP has provided higher annualized returns than XLF over the past three years. However, this higher return comes with higher volatility. AXP's annualized volatility has consistently been higher than XLF's, indicating that AXP is more sensitive to market fluctuations. Additionally, AXP has experienced larger maximum drawdowns than XLF, suggesting a higher risk profile.
  • Risk-Adjusted Performance: AXP's Sharpe Ratio has generally been lower than XLF's, indicating that XLF has offered a better risk-adjusted return over the past three years. This suggests that XLF has been able to generate higher returns for a given level of risk. AXP's higher beta further confirms its higher risk profile, as it is more sensitive to market movements than XLF.
  • Overall Assessment: AXP has demonstrated strong performance over the past three years, consistently outperforming the broader financial sector. However, this performance comes with higher volatility and risk. AXP's higher volatility and larger drawdowns suggest that it is a more risky investment than XLF. While AXP's recent trends indicate a potential decrease in volatility and an improvement in risk-adjusted returns, investors should carefully consider its risk profile before making any investment decisions.
Peers Price History(as of 2024-10-15)
Capital One Financial Corp. (COF)Visa, Inc. (V)
  • Performance Comparison:
    • AXP has consistently outperformed both COF and V over all the periods analyzed, with particularly strong performance in the longer-term periods. This suggests that AXP has been a more successful investment than its peers.
  • Risk and Return Analysis:
    • AXP has provided higher annualized returns than both COF and V over all the periods analyzed. This suggests that AXP has been a more profitable investment than its peers.
    • AXP's annualized volatility has been higher than V's, but lower than COF's. This suggests that AXP is more volatile than V, but less volatile than COF.
    • AXP's maximum drawdown of 31.55% is lower than COF's 50.38% but higher than V's 28.6%. This suggests that AXP has a lower risk profile than COF, but a higher risk profile than V.
  • Risk-Adjusted Performance:
    • AXP's Sharpe Ratio has generally been higher than V's, but lower than COF's. This suggests that COF has offered the best risk-adjusted returns, followed by AXP, and then V.
    • AXP's beta suggests that it is more volatile than the market, but less volatile than COF. This suggests that AXP is more sensitive to market movements than V, but less sensitive than COF.
  • Overall Assessment:
    • AXP has consistently outperformed its peers in terms of both absolute and risk-adjusted returns. However, it has also been more volatile than V, but less volatile than COF. This suggests that AXP is a good investment option for investors who are willing to accept a higher level of risk for the potential of higher returns.
    • AXP's recent trends suggest that it is becoming less volatile and less sensitive to market movements. This could be a positive sign for investors, as it suggests that AXP is becoming a more stable investment.
Peers Fundamentals(as of 2024-06-30)
Capital One Financial Corp. (COF)Visa, Inc. (V)

  1. Market Position and Size:

    • American Express Co. (AXP) is a mid-sized player in the payments industry, with a market capitalization significantly larger than Capital One Financial Corp. (COF) but considerably smaller than Visa, Inc. (V).
    • AXP's market cap is positively correlated with its revenue, EBITDA, and net income, reflecting its larger size and market presence compared to COF. However, AXP's financial metrics are considerably lower than V's, highlighting the scale advantage V holds.

  2. Profitability and Efficiency:

    • AXP exhibits strong profitability compared to COF, but its profitability metrics are lower than V and the industry average.
    • AXP's operating efficiency is lower than V's, but it is more efficient than the average company in the industry.
    • AXP's efficiency in generating returns is relatively strong compared to its size and market position, outperforming COF but lagging behind V and the industry average.

  3. Financial Health and Stability:

    • AXP's liquidity position may be similar to its peers, potentially indicating a lower level of liquidity compared to the industry average.
    • AXP has a higher level of debt relative to its equity and earnings compared to its peers and the industry average.
    • Despite higher debt levels, AXP's market cap and financial performance suggest that its debt burden is manageable.

  4. Valuation and Market Perception:

    • AXP is valued relatively lower compared to V and the industry average, but higher than COF, based on its sales, EBITDA, and earnings.
    • This suggests that the market may perceive AXP as a more value-oriented investment compared to V, but less so than COF.

  5. Cash Flow and Capital Management:

    • AXP's cash flow generation is lower than its peers, despite its larger market cap.
    • AXP invests more in capital expenditures compared to its peers, despite its larger market cap.
    • This suggests that AXP may need to improve its cash flow management and capital allocation strategies to enhance its cash flow generation.

  6. Growth and Future Prospects:

    • AXP exhibits strong growth in most areas, outperforming its peers and demonstrating accelerating growth trends.
    • AXP's growth is balanced across different metrics, with strong growth in both revenue and profitability, suggesting sustainable growth.

  7. Potential for Investment:

    • AXP presents an attractive investment opportunity, considering its strong growth, profitability, and manageable debt burden.
    • However, its lower efficiency in generating returns and cash flow compared to V and the industry average may be a concern for investors.

  8. Key Risks and Considerations:

    • AXP's lower efficiency in generating returns and cash flow compared to V and the industry average may indicate a need for improvement in its operational efficiency and capital allocation strategies.
    • AXP's higher debt levels compared to its peers and the industry average may pose a risk if its financial performance deteriorates.

  9. Overall Assessment:

    • American Express Co. (AXP) is a financially healthy company with strong growth prospects. However, it faces challenges in improving its efficiency in generating returns and cash flow compared to its peers and the industry average.
    • AXP's competitive position is strong, but it needs to address its efficiency and cash flow generation challenges to maintain its competitive edge.
    • Investors should consider AXP's strong growth potential and manageable debt burden, but also be aware of its lower efficiency and cash flow generation compared to its peers and the industry average.