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Amex’s Valuation Is Fair amid a Volatile Operating Performance

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Jan. 25 2017, Updated 7:36 a.m. ET

Growth outlook

American Express (AXP) expects its EPS (earnings per share) to be between $5.60 and $5.80 in 2017 on the back of revenue growth, marketing spending, and operating expenses. 

The company’s restructuring initiatives could help improve its operating margins in 2018. The success of its spending initiatives will be better evaluated in the coming quarters.

In 4Q16, Amex posted adjusted EPS of $0.91, lower than analysts’ consensus estimate of $0.98. Sequentially, it saw a fall of 29% in its EPS on the back of lower card spending and higher expenses.

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Fair valuations

As of January 2017, American Express stock has risen 21% over the past year and 14% over the past quarter, primarily due to its higher initiative and restructuring spending. The company is currently trading at a one-year forward PE (price-to-earnings ratio) of 12.3x, compared to the industry average of 19.3x.

Amex’s major competitors are trading at the following forward PEs:

  • MasterCard (MA): 25.3x
  • Visa (V): 21.2x
  • Discover Financial Services (DFS): 11.4x

Together, these companies account for 2.0% of the iShares Core S&P 500 ETF (IVV).

On a trailing-12-month basis, Amex is trading at 13.6x, compared to its competitors’ average PE of 25.0x. The company’s valuations are lower due to its nonrenewal of certain partnerships, its weak domestic earnings, its high restructuring charges, and increased competition on the cost front.

Amex is spending heavily and is expected to continue on this trajectory in 2017. It has yet to see strong growth following the nonrenewal of its contract with Costco (COST). Warren Buffett, Amex’s major shareholder, is confident about the company’s long-term performance following its current adjustment period.

In the next and last part of the series, we’ll see how analysts are rating Amex.

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