August 11, 1995
On Friday, August 11th we're closing out our holding of. . .
TYPE: Dow Yielder
Phone: (212) 640-2000
Closing prices, August 10, 1995: Bid $38 7/8 Ask $39
Trailing 12-month revenues: $14.3 billion
Trailing 12-month EPS: $2.78
Last quarter reported: July, 1995 (1Q 1996)
Next quarter report date: Around October 20th
Consensus EPS estimate for quarter: $0.80e vs. $0.71
FOOL ratio: N/A
-------> TRADE: Selling our 180 shares
Shed a tear, Fools, for today we sell off one of our favorite holdings from The Fool Port, 1995: American Express (NYSE:AXP). We bought AXP at $27 5/8 last year, with a cost of $28.07 per share after commissions. This came at a time when many investors were naming the company dead in the water, what with banks dealing out Visa cards and merchants fleeing American Express's high pass-through fees. Why would anyone buy this stock at $28 per share with the market slumbering along as it was last August?
Pick either of two answers below.
BEATING THE DOW. Let's start with the first. American Express rung in as one of the highest-yielding and lowest-priced of the Dow thirty stocks. No doubt you, Fool, are familiar with the Beating the Dow approach (BTD).
But further, you can find in our new Dow 30 area some price targets, which we also used. Price targets? That's right, we did an unusual thing, actually running cursory valuations on our Dow stocks, something Michael O'Higgins didn't do too much in his book. Our valuation technique for Dow growth stocks is a Year-Forward PEG, tabulated by multiplying the 5-year projected growth rate against year-ahead earnings projections. We diddle around a bit with their cash position and factor in management strength as well.
And now, the beauty of this medium is that we can pull old posts from the appropriate folders to see how we fared. Posts like this one from the AmEx folder, eight months back and one week after Warren Buffett announced his intention to add to his position in American Express at $32 a share:
Subj: Re:Mr. Buffett.
Date: 95-03-16 12:03:20 EDT
Posted on: America Online
I think Buffett is looking a decade forward, and doesn't mind buying AXP at a price elevated off recent lows. Frankly, I expect to be cashing out America(n) Express in the high $30s to $40 when our Beating the Dow year ends. . . and the rate hikes have past.
Remember, when he bought Coca Cola, he announced to the nation that he was buying the stock too high, that it was overpriced in the short-term. Ahh, patience. Let's not hold him accountable based on a few hours, weeks, months. . . at least no(t) in Fooldom! :)
MANAGEMENT. The second reason to buy into this Company at $28 a share last August was management. American Express has assembled an extraordinarily fine management team focused on returning AXP to growth-company status via strengthening their brand and concentrating on their higher-margin offerings. We considered this restructuring and the talk of using the new technology to be a very bullish indicator. Let us just share a few gems from American Express' 1994 Annual Report in the letter to shareholders from Fool favorite, CEO Harvey Golub:
"Our focus on the brand means that our business must be consistent with the attributes our customers associate with the American Express brand---security, integrity, commitment to customers, service excellence, global presence, and recognition---and that each business use the brand as an integral part of its strategy.
"We expect our competition will get stronger in the years ahead. That underscores the importance of achieving a cost basis that is best-in-class, providing superior value to each customer we serve and running our business in a way that helps build and broaden the American Express brand.
"There is a continuing effort to enhance the control and compliance environment throught the (American Express) Bank, as well. The need for such actions was underscored during the year when a subsidiary of the Bank reached an agreement with the Justice Department to settle claims related to money laundering charges against two former employees.
"However, we have not moved as rapidly nor as broadly as I would like on a number of fronts. Our costs are still too high; we are still too bureaucratic and too slow to adapt."
OK, as a Fool sees it, those are the words of a management squad that is forthright, committed to long-term value, quantitative, and dedicated to their customer and shareholder bases. A management team with a vision. The charge and credit card businesses, the world of financial planning and insurance selling are extremely competitive sectors, as was well detailed in last week's NY Times Sunday Magazine article on AXP and Mr. Golub.
GOING FORWARD. But with a well-devised mix of what has worked with what is possible on the new technology, American Express stands to gain ground going forward. We think the Company's ExpressNet service here online is a good example of their shift toward technology. And AXP capped at $20 billion today still looks attractive to us, but we live by our Beating the Dow model. It pointed us to the 39% growth in this stock, which stacks up nicely against S&P 500 returns off 22% during the same period.
And now that we're moving on from this investment, let us poke a little fun at the Wise on the way out. Did you know that Michael Murphy, he of the Overpriced Stock-Service (heavily short America Online all the way up and with losses totaling 88% for his newsletter over the past five years) was, in 1969, the designer of investment programs for American Express? And when AmEx bought San Francisco-based Fireman's Fund, Murphy moved West to become a securities analyst and money manager. Yikes! It would appear that they've now phased out those programs 25 years later, after AXP underperformance of the S&P for some time.
And lastly, before we bid adieu to American Express, let us invite you to peek at a portion of MF Bogey's terrific valuation posts on the stock, offered up to Fools in mid-May. Just check out the American Express folder in our Stock Boards for great stuff like this, below:
Subj: Re:The latest word?
Date: 95-05-22 00:47:36 EDT
From: MF Bogey
Posted on: America Online
American Express (AXP)- Fool pick, BTD, and Buffett baby
Revenue per share $28.89 Trailing EPS $2.76 Return on Equity (ROE) 19.76 % Profit Margin (PM) 9.64 % 5 Yr Est. Growth Rate 12.40 % Shares Outstanding 495.87 million Book Value $12.57 Current ratio N/A <--- Quick Ratio N/A <--- relevant? Debt/Equity N/A <--- Cash + Short-term equivalents 15.4 mil
At the request of Mr FlyBoy, here is my look at American Express and its respective valuation methods.
When looking at a company's balance sheet and growth prospects, I use several valuation methods, 6 to be exact! I take 6 different "pictures" of a company, look at them all under a super electron microscope, and then see if they all "fit" into the big picture. The 6 methods are all pretty simple, here they are.
1. PEG- standard PEG valuation made famous the world over right here in Fooldom!
2. YPEG- a little "longer" look at the basic PEG, (see above : )
3. Ben Graham Value model. - Ben Graham was the Father of Value Investing. Warren Buffet was his prize student. Basically, Ben believed that for a company to have intrinsic "value" it must be able to return better than AAA Corporate bonds, or "why bother?"
4. MF Templar's ROE method.- Templar featured this method in his weekend Today's Pitch. REAL SIMPLE ! Add a companies Return on Equity (ROE) to it's EPS growth rate, and divide by 2! See how easy that is? The result is a fair "multiple".
5. MF Uptrends Earnings Yield- Uptrend has recently provided us with excellent profiles on some of the drug stocks. His basic idea is this: Calculate the Earnings Yield. (EY) = Trailing EPS / price. Then take the square root of (EY x ROE). Sounds tricky, it really isn't!
6. DuPont ROE analysis- ( Trailing 4 quarter revenue * Profit margin) / [(Total shares * Book Value per share) - (Dividend per share / book value per share). The result of this equation gives us a fair multiple.
... Bogey then goes on to show all the numbers, most of which put target prices in the high $30's to mid-$40's. Go back and check it out! And expect to see much more of this great analysis on our Dow boards in the year ahead.
--Tom Gardner, August 10th, 1995