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Is Buffett’s Bet Boosting Amex’s Valuations?

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Growth outlook

American Express (AXP) expects its EPS (earnings per share) to be between $5.65 and $5.75 in fiscal 2016, including the restructuring charges of first three fiscal quarters of the year. On an adjusted basis, excluding restructuring, the company expects EPS of $5.90–$6.00, translating into a PE (price-to-earnings) ratio of 12.8x.

For 2017, Amex expects a minimum of $5.60 in EPS, which would reflect competition in domestic markets and lower penetration, partially offset by higher spending internationally.

American Express’s performance over the long term depends largely on its capacity to expand network and partnerships in and outside of the US. The impact of the Costco Wholesale (COST) breakup is still evident in its results.

Meanwhile, the company’s investments in initiative spending, product offerings, and expansion should help reduce growth fears. In 3Q16, Amex posted adjusted EPS of $1.24, which was higher than the analyst estimate of $0.97.

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Subdued valuations

As of November 2016, American Express stock has risen by 1.8% over the past year and by 20% over the past quarter, primarily due to its strong performance in 3Q16. The company is currently trading at a one-year forward PE ratio of 12.6x, as compared to the industry average of 19.8x. The discount has reduced in recent months on better-than-expected performance.

Amex’s major competitors are trading at the following premiums:

  • MasterCard (MA): 28x
  • Visa (V): 32x
  • Discover Financial Services (DFS): 12x

Together, these companies account for 1.8% of the iShares Core S&P 500 ETF (IVV).

American Express’s valuations are still lower than those of peers due to the non-renewal of select partnerships, weak domestic earnings, and high restructuring charges. The company is targeting cost savings of $1 billion by the end of 2017, which should help improve its operating margins.

The company is spending heavily on restructuring, which could help diversified earnings from the client’s and region’s perspective. Notably, Warren Buffett, Amex’s major shareholder, is confident about the company’s performance after its current adjustment phase.

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