Organic Growth Is Crucial For American Express Company (AXP)
American Express Company (NYSE:AXP) has had a poor start to a year, seen by the stock plunging to a new low of $52 a share in February. The crash came on investors reacting to a loss of two valuable card deals. The loss of Costco Wholesale Corporation (NASDAQ:COST) and JetBlue Airways Corporation (NASDAQ:JBLU) deals spooked investors most of whom feared the same could derail the company’s trajectory over the next few years.
American Express Company (NYSE:AXP) current share price of about $64 a share has bounced off its 52-week high of $81.92 a share. The current share price, however, offers an exciting entry position for investors looking to unlock some value in a company betting big on organic growth.
Amex Credit Card Spending On the Rise
If first quarter earnings are anything to go by, investors’ concerns may have been blown out of proportion. Excluding Costco business, Amex global business was up by 7% in the first quarter further affirming its strong fundamentals.
First quarter earnings have already confirmed that American Express Company (NYSE:AXP) business model is not dependent on co-brand credit card partnerships. Its card business continues to show decent volume growth having registered a 3% growth in the recent quarter.
The fact that the company features in top 30 global brands means users are increasingly using its cards for transactions. Partnerships with top merchants in the US all but guarantees a stable revenue stream in the domestic market even as Amex continues to pursue opportunities on the global scene.
Solid International Business
International divisions, Global Commercial Services, and International Card Services, which accounts for 46% of the company’s total revenue, also continue to register robust growth in revenue. Heavy spending, however, continues to deal a big blow the amount of income generated by these two units even on revenue growth.
American Express Company (NYSE:AXP) has also been on an investment spree on the two divisions in the recent past. Some of its efforts are already bearing fruit and once the aggressive spending stops net income should edge higher. Given the size of the company’s balance sheet, more investments could be on the cards as the credit card giant moves to fuel growth.
The fall of the stock to the current lows should not be a concern for any investor looking to unlock some value in the end. From the valuation standpoint, there is no doubt that Amex is undervalued given that it is trading with a price to earnings ratio of 12.9 against an industry average of 17. The stock is also trading way below its 5-year average P/E of 15 highlighting some room for growth.
A dividend yield of 1.8% makes it an exciting pick for investors wishing to generate some income through payouts. American Express Company (NYSE:AXP) plans to buy back up to 10% of its outstanding shares. Considering free cash flow has been increasing over the past three years there is no doubt it will be spending big on this front as it looks to take advantage of the current share price that undervalues the business.
Given the strong fundamentals both on the domestic and international front, American Express Company (NYSE:AXP) remains a strong value stock. A solid business dynamics is reaffirmed by the fact that a good chunk of its revenue is generated as a percentage of the total amount that clients transact. What this means is that its earnings are a natural hedge for inflation and will always continue to increase as the value of goods increases.
Trading higher from the current levels looks like a possibility, given American Express Company (NYSE:AXP) solid fundamentals backed by organic growth across various segments.
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