Today's earnings report was simply more of the steady growth we've grown accustomed to seeing from this company. AmEx's mature business may not be on a torrid growth pace like that of Yahoo! or Cisco, but the big-brand financial services supermarket has been a market-beating investment for us over the past 20 months of ownership, having nearly doubled the return of the S&P 500. Those types of returns are more than satisfactory. Further, AmEx continues to impress with nifty innovations such as the commission-free online brokerage, which we take advantage of with this very real-money portfolio.
The only problem is that AmEx largely defies the Rule Maker analytical methods that we normally apply to our companies. You can't calculate a meaningful gross margin, flow ratio, or cash-to-debt ratio for American Express. Not only does that make AmEx a tough nut to crack, but also it begs the question of whether AmEx is really a Rule Maker. I mean, we all know this company has a dominant presence in virtually every corner of the financial services world, and the American Express brand is virtually unparalleled in prestige and class, but is this business model really the stuff of a Rule Maker? Or, is it another type of dominant company that deserves a separate label from our high-margin, low-debt Rule Makers?
For some time now, Phil and I have been talking about setting up some unique criteria for evaluating banks and other financial services companies, and now Zeke is jumping in the ring for promoting action on this front. Tonight, I want to introduce a few ideas I've had on how to evaluate these companies, the ones in the financial services industry that are making rules, the Finance Kings, as I propose they be called. Also, I'm purposely keeping this column short so we can corral on the Rule Maker Strategy board and discuss which metrics make the most sense in analyzing financial services companies.
Here's my first draft of the five core financial criteria for evaluating Finance Kings:
- Sales Growth > 10%
- "Efficiency Margin" (1 minus the efficiency ratio) > 20%
- Net Margin > 7%
- Asset Turnover (revenue divided by assets) > 0.15
- Leverage Factor (assets divided by equity)
You'll notice that each of these metrics is somewhat parallel to the current financial criteria, items 6-10 within Rule Maker Step 6. The numerical parameters are only starting points for discussion. I'm quite certain that our collective discussion of this matter will produce a much more useful set of criteria and parameters than I could outline on my own or just among myself, Phil, and Zeke.
If you're interested in participating in this little project, come pitch in your thoughts and suggestions on the Rule Maker Strategy board. And if you have a better name than "Finance Kings," toss that in as well.
One final note to fans of Yahoo! (Nasdaq: YHOO): The transcript of our recent Fool interview with Yahoo! CEO Tim Koogle, including a discussion of his thoughts on the AOL-Time Warner merger, is now available by clicking here.
- Matt Richey