Has American Express Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if American Express (NYSE: AXP  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at American Express.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

4.7%

Fail

 

1-Year Revenue Growth > 12%

3.2%

Fail

Margins

Gross Margin > 35%

77.3%

Pass

 

Net Margin > 15%

17.1%

Pass

Balance Sheet

Debt to Equity < 50%

309.6%

Fail

 

Current Ratio > 1.3

2.26

Pass

Opportunities

Return on Equity > 15%

26.8%

Pass

Valuation

Normalized P/E < 20

14.11

Pass

Dividends

Current Yield > 2%

1.4%

Fail

 

5-Year Dividend Growth > 10%

5.4%

Fail

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at American Express last year, the company lost a point after sustaining its score of six from 2010 to 2011. But the stock is up more than 20% as the financial company has made significant headway in developing its business model and evolving into the mobile-payments arena.

AmEx was among the first cards to gain traction in the pioneering early years of plastic. Yet with Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) having developed into much larger networks, AmEx faced the threat of being left behind as payment systems evolved beyond physical cards.

But AmEx has risen to the challenge and taken a number of steps not only to defend its turf but to become more aggressive against its rivals. With a partnership with social giant Twitter, AmEx allows its cardholders to sync their cards to their Twitter accounts and receive customized deals.

Of potentially greater impact, though, is AmEx's deal with Wal-Mart (NYSE: WMT  ) to offer its new Bluebird prepaid debit card. With no activation fee, no minimum balance requirement, and no monthly fee, AmEx is making an attractive pitch to underbanked customers. That has the potential to widen AmEx's target audience greatly, given its long-held reputation for high-end affluent customers.

The question going forward is whether AmEx can protect its sterling reputation for customer service. With AmEx topping the list of card companies in a J.D. Power study, narrowly beating out Discover Financial (NYSE: DFS  ) , AmEx can't afford to sacrifice service for profits.

For AmEx to improve, it needs Bluebird to help vault its revenues higher while looking for ways to boost its dividend. If it succeeds, AmEx could get a lot closer to perfection quite quickly.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Financial stocks like AmEx have been a minefield for investors, and big banks have especially been vulnerable to losses. But the sector has one notable stand out. In a sea of mismanaged and dangerous peers, it stands out as The Only Big Bank Built to Last. You can uncover the top pick that both we and Warren Buffett love today in our special report. It's free, so click here to access it now.

Click here to add American Express to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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