FOOL ON THE HILL
An Investment Opinion
Literally a financial services supermarket, American Express stands out among the crowded space of banks and brokerages based on two unique assets. One is its dominant position in corporate services, serving more than 70% of the Fortune 500 with its popular American Express Corporate Card. Second is its world-class brand, which ranks highest among all financial services providers and #19 among all global brands, according to a study by Interbrand. AmEx also stands out for one asset that it doesn't have -- the expensive branch network that burdens most regional banks. As financial services moves to the Internet, ATMs, PCs, and mobile phones will be AmEx's "branch network."
All of these favorable trends have led American Express shares to solid outperformance in the last five years. A $100 investment in AmEx stock at year-end 1994 was worth $602 by the end of last year, including reinvested dividends. By comparison, that same $100 appreciated to $356 in the S&P Financials and $351 in the S&P 500. Particularly in the past year, AmEx stock has dramatically outperformed its peers as investors have taken notice of the company's strong push onto the Internet.
AmEx's Internet strategy became a reality over the course of 1999. Beginning in July, AmEx began unveiling a steady stream of new products to take advantage of the online medium. First came the launch of American Express @Work, a business portal site that allows customers to manage their AmEx Corporate Card purchases. Soon thereafter, American Express became overnight a nationwide bank with the rollout of Membership B@nking. An online bank aimed at retail customers, Membership B@nking offers several account options, all of which are generally distinguished by high rates on deposits, rebates on ATM surcharges at other banks, and online bill payment.
The next Internet initiative came in September with the introduction of Blue, a consumer credit card with a built-in smart chip and special security and rewards for online shopping. According to AmEx, Blue has "significantly exceeded expectations." Next up, in October, the company took on the likes of Charles Schwab (NYSE: SCH) with the launch of American Express Brokerage, featuring commission-free trades for accounts with greater than $25K in assets.
Of course, not all things financial can be taken care of on the Internet. To address this problem, AmEx acquired three additional ATM networks during 1999. That gives the company a total of 9,000 ATMs, which makes AmEx the largest off-premise ATM deployer in the U.S. This network, to be called "ATM Axis," will allow AmEx customers to conveniently access cash and make deposits. Additionally, AmEx intends to utilize the network for some outside-the-box services such as ticketing and retail couponing.
Beyond these many Internet initiatives, this year's annual report also chronicles the happenings inside AmEx's bread-and-butter businesses. AmEx's overall charge/credit card business did great in 1999. Revenues for that segment increased 15% thanks to a 7.8% increase in the number of total cards in force, which now stands at 46 million. The average cardmember spent $7,758 last year, up from $6,885 in 1998. Worldwide, the average annual spending on an American Express Card is almost four times higher than on the average Visa or MasterCard. Bear in mind that most of AmEx's revenues come not from interest on revolving balances, but on the 2.72% cut that AmEx takes on each and every transaction, called "discount revenue." As the world continues to shift to plastic as the primary means of purchasing, AmEx will reap the benefits.
The company's other major business line, Financial Advisors, continues to do OK considering the intense competition it faces from discount brokerages, including AmEx's own new service. Financial Advisors revenue increased 17% for the year.
In total, 1999 was an excellent year for AmEx. That excellence also showed up in the financials. One number stood out in particular -- operating cash flow. On the company's Statement of Cash Flows, clue in on the line item "Net cash provided by operating activities." This number can be thought of as the cash equivalent of net income. For AmEx, operating cash flow increased 67% to $7.4 billion. That's an outstanding level of profitability on the company's total revenues of $21.3 billion.
On the basis of operating cash flow (OCF), AmEx's valuation stacks up nicely to its major competitors, as can be seen in the table below:
($ Billions) 1999 OCF Market Cap Price-to-OCF
AmEx 7.4 68.9 9.3
Bank One 3.6 38.4 10.6
Citigroup 9.2 205.2 22.4
Schwab 1.2 49.8 42.2
Here in 2000, if American Express can continue to innovate new financial services as well as refine and improve its many recent Internet initiatives, the company should be able to build on the outstanding foundation established in 1999. As for the stock, the valuation looks incredibly reasonable considering the strength of AmEx's business and the quality of its underlying financial results.
See what all you can learn from a simple annual report?