The markets have stayed away from the financial sector all year. Although investor skepticism is understandable, American express has proven that it still has a durable competitive advantage.
When valuing the stock at $40 per share, it evident that the market is still pricing the stock at 2009 earnings level. Fear that the Department of Justice lawsuit will cripple American Express seems to be the foundation of ignoring the strong earnings the company has posted in 2010. It is impossible to predict how the lawsuit will turnout but history would indicate American Express will win. Assuming the company losses there will be a onetime fine and a cease and desist order. The potential downside of a verdict damaging American Express's long-term competitive advantage is small. The verdict is a few years away and the company will continue to grow its earnings at a strong rate in the meantime.
For the yearend, Value Line is predicting $3.20 per share, which translates to pre-tax earnings of $4.85 p/s. With a stock price of $40, this would be a 12% pre-tax yield which is a very attractive price.
I would argue that this could be a conservative valuation for the year. The company has already earned $2.49 p/s in three quarters. If American Express matches the average $0.83 earning per-quarter the total for yearend would be $3.32, 12 cents higher. Of course, the fourth quarter is holiday season and $1.00 earnings p/s would not be an unreasonable estimation. That would bring the pre-tax earnings p/s for 2010 to roughly $5.20 a share or a 13% pre-tax yield for a $40 stock. In addition is yielding a 1.8% on the dividend. In a world pressed for better yields, this stock looks really good.
The beauty of American Express is their durable competitive advantage which will allow for continuing stable and growing earnings well into the future. With two recessions over the last decade the company grew its earnings at 4% a year on average with a 14% earnings growth when removing recession years.
Declaimer. This article does not advise for any individual to purchase stock on the analysis of this article. Individuals should do their own research before buying any equity. The author of this article owns shares in American Express Company and could be have a bullish bias.