Amex has very consistent earnings, with the exception of the Costco related troubles. I suppose we don’t know where the earnings will go in the quarters to come. But long term…up.

Current price is $64.05. EPS is $5.53. P/E is at 11.38

That’s an 8.6% 1year rate of return.

So the question is: at what rate will those earnings grow? And what will my annualized rate of return be moving forward?

I could only quickly find info going back to 2006. Earnings in 2006 were 3/share and in 2015 for our purposes, earnings are 5.53 a share.  The rate of return on earnings growth is 7.03%over those 9 years.

Earnings in 2010 were 3.35/share and so the rate of return for the 5 years between 2010and 2015 would be 10.54%.

We could reason that if I bought Amex, I would be getting a 8.6% return and this rate of return would grow because per share earnings, aside from this Costco garbage, might very well grow at 7.03-10.54% per year.

Amex does have a ton of debt. 230% debt to equity.

P/E is 11.51, much lower that the 14.5 or so that was customary for the last 5 years.

Return on equity is more that 26%, and pretty consistently in the mid twenties for the past 10 years.

Since a low of about 10b in 2005 until about 21b as a present high, the rate of return was no slouch when accounting for dividends paid out. Per share this is about 7.7%.

Lets go with current book value/equity per share of 21.34. Assuming no dividends were paid, in 10 years we would have a whopping $198 per share in book value if we used a 25% return on equity…figures must be taken with a grain of salt…because dividends would be paid out…thereby reducing the equity base.

Because this figure is astronomical, it tells me that Amex must engage in share buybacks in a pretty serious way. And they must rejigger their return on equity figure in some other way…i.e. leverage.

So, assuming arguendo, that we used 198 as our projected book value per share in 2025 (and in reality it will be more like 40 something per share). I would need to buy shares at 48.94 per share to give me a 15% per year return.

Its a good business, but there is no reason to expect 15% per year growth. Pass. Buffett doesn’t buy more Amex for a reason.

Upon revision, dividend is about 1.16 per year.  Which is about 21% of the earnings per share.  So assuming we have 20% return on equity that is used for business purposes and/or reinvested, we’d be looking at a book value of 134.11.  And we’d have EPS of something like 30.82, and assuming a low p/e of 11, we’d be looking at a price of a rocking of 339.02 plus the dividend of of 9.8…we’d be looking at a huge growth rate, like 18.62.  Unfortunately, it’s forseeable that their earnings will be impacted to the tune of 20 percent because of Costco, and recent court rulings.  Let’s say we only grew the book at 16%.  That would put book at 95.55, so with a return on equity of 20, we could call their EPS would be 19.11 for a very conservative price of 210.21 plus those dividends of 9.8.  We’re looking at a great growth rate.  I’ll readjust my price point to a very conservative 55.5.  I’ll buy it up all day at that price.    We’ll see, I set staggered alerts.

According to Forbes, American Express is the 22nd most valuable brand in the world.  Buffett owns more than 15% of the company, and his ties and fondness are pretty well documented. (It seems like every other speech that he and Munger have given for the past 50 years has involved some reference to the vegetable oil scandal.  Munger even recently talked about how Valeant is NOT like Amex was in the 60s).  My point is Amex has street cred.

It is taking major heat (1) they recently lost the merchant rules antitrust lawsuit (now merchants can apparently put up signs saying they prefer visa or mastercard because of Amex’s higher fees); (2) they lost the Costco co-branded business; and (3) they lost the Fidelity co-branded business.  The Costco loss seems like it was a big issue, Fidelity not so much.

The Amex earnings are really going to be hurt in 2016 because of the Costco issue, but the antitrust issue doesn’t seem like a company crippler (even though I read a press release from Kenneth Chennault saying it was just that).

I read somewhere (maybe it was a Graham writing) that lawsuits are never as bad as they seem when you are on the receiving end, and never as profitable as when you are on the prosecuting end.  I can attest to this as a trial lawyer.

Even with the earnings hit, Amex’s earnings are still strong.  They are spending tons of capital trying to snag another big fish, another Costco.  Although their offshoot ventures, i.e. Bluebird, etc. seem, well, kinda lame.

Overall, its an awesome company with an awesome history.  Personal experience says that they are the best and they know it.  Even their employees are positive about their company…seems that way anyway.  Unfortunately they are embattled right now.

Visa is pac-maning their co-branded partnerships, and their customer base is completely dwarfed by visa and mastercard.  Then again business owners, execs and high net worth customers know Amex is the best.

Qualitatively, Amex is great.  They will continue to be great.

 

Ok. On a macro level, there is a lot of instability in the global economy.  More than usual?  What are the causes?  I guess China and their slowing growth, perhaps a lack of overwhelming growth in the US, coming off a long bull market, instability in Europe, a pricey dollar, pessimism.  There’s a lot more.  Which of these fears are based on reason?  Can the outcome of these ongoing concerns be predicted.  It seems like a lot of smart people who are paid to have opinions have opinions on these issues, and a few of the smartest people wont publicly venture their guesses.

What is reasonable is that there are arbitrage opportunities that provide investment grade profit opportunities; there are real companies out there earning real money; there are bonds that have real coupons.

My purpose here is to look at different investment opportunities and to provide an assessment, and, ultimately, to show the math in making the decision to purchase a security v. another security or not.

Some stocks will need to be purchased in a pool.  Some will be purchased with the intent to hold long term, maybe forever.  I’ll think through some shorts but we’ll see if I pull the trigger on any.  I’ll assess arbitrage opportunities and workouts, etc.   I might get involved a bit but because I’m only working with my own funds, and thus limited funds, it might not be worth the effort.

That being said 2016 is off to a very rocky start, so it might make sense to focus a bit more on bonds, arbitrage and workouts because generally when the market has a bad year the value pools that I intend to buy are not going to be fairly valued.

Well see.  I wish myself good luck.