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I own banal in all three above acclaim companies, Visa (V), Mastercard (MA), and American Express (AXP). I appearance all of them as investable businesses for the appropriate price, but unfortunately, these businesses are absolutely abandoned investable aback the amount is about abutting to appealing, or at the absolute atomic what one adeptness accede adequately valued.

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So aback I looked at American Express, I ample it was time to coalesce my all-embracing attitude on the aggregation with a solid commodity answer my account and answer the aggregation as a whole. This is abnormally authentic because compared to the added above acclaim agenda companies, AXP is absolutely rather underfollowed.

This commodity aims to do aloof that - answer - and appearance you why I'm accommodating to pay today's amount for AXP.

The American Express company, or Amex, is one of the oldest banking companies in actuality and can trace its roots aback to its founding aback in 1850, over 170 years ago. It's a affiliate of the Dow Jones, and it's best acclaimed for its allegation card, acclaim card, and accompanying businesses, including things like traveler's checks and the like.

The aggregation is by many, including Forbes, advised to be one of the best admired brands in the world, and as of 2019, has a bazaar allotment (in the US) of abutting to 11.3%. While not as ample as adversary Visa and from assertive respects could be said to be active in agreement of bazaar share, it nonetheless holds a absolute absorbing business.

How impressive?

As of FY19, the aggregation had about 114.4M cards in force, with about 54.7M cards in the US alone. The boilerplate anniversary spending on an AMEX was about $20,000, and this includes chump cards, baby business and accumulated cards from AMEX.

In agreement of complete size, the aggregation is the fourth-largest accepted purpose agenda arrangement based on acquirement volume, abaft China UnionPay, Visa and Mastercard. It's additionally the 4th bigger in agreement of cardinal of cards. The aggregation is additionally absolute in new acquittal methods and supports both Google Pay and Apple Pay, and AMEX cards additionally abutment NFC payments.

(Source: AMEX)

The aggregation gives us three operating segments, which additionally act as the company's reportable segments. We acquire the All-around Chump Casework (GCSG), All-around Commercial Casework (GCS) and All-around merchant and Arrangement Casework (GMNS), with authoritative SG&A and added businesses included in the fourth, "other" segment.

(Source: AMEX)

The segments act adequately self-explanatory. The all-around card-issuing casework are run through GCSG and GCS, and the aggregation can be advised best acclaimed for its cards accepted as the Green, Gold, and Platinum cards - which are either allegation or acclaim cards depending on chump geography. There are additionally specialty products, such as the alleged "Black Cards," area AMEX tries to baby to every accessible chump segment. Between its assorted blush cards, it additionally has co-branded acclaim cards, usually begin in either the Airline, Auberge or Retailer segment.

One of the problems AMEX faces alfresco of the USA is the bound availability of AMEX accepting in non-US geographies. As an AMEX cardholder in Sweden, it's not at all aberrant for me to appointment accepted restaurants or alike food - alike grocery food - that don't acquire AMEX. This is absolutely a bit of an affair aback aggravating to aggrandize things - seeing the acutely boundless accepting of Visa and Mastercard. The company's merchant accepting business acutely has some assignment to do alfresco of aggregation accepted geographies to get up to par with its competitors.

We allegation to additionally acknowledgment the company's absolutely abundant assurance on the biking and auberge industry, area AMEX has cogent exposure, and as a aftereffect of COVID-19, some not-insignificant liability.

The company's acquittal networks is accessible in about 94 countries about the world, and the arrangement is maintained by the GMSN segment. As things angle today, it's accessible to see that AMEX absolutely needs to advance things alfresco of their home geographies a bit.

(Source: AMEX 2019 10-K)

Unlike some of its competitors, AMEX focuses on a spend-centric business archetypal with primary acquirement drivers actuality spending as adjoin to accounts accuse and fees. The aggregation angle this action as advantageous, compared to competitors, area AMEX has a college per-card absorb and additionally alms bigger amount to barter and merchants. This gives AMEX the abeyant to action associates rewards and benefits, as able-bodied as targeted business and investments. It is AMEX's appearance that this creates an allurement for users to absorb added on their cards.

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AMEX competitors are adequately bright - as I mentioned before, the four basic ones are China UnionPay, Visa, and Mastercard, but there are additionally abate ones like Discovery, Diners Club, and others.

In short, AMEX makes its money by facilitating a globally chip acquittal system, accouterment acclaim and allegation cards to consumers and businesses. There are fees, absorption charges, merchant charges, and abounding added means for a acclaim agenda aggregation like AMEX to accomplish its money. Its about low acclaim costs, aerial abatement ante and added aggregation qualities are acclaimed and accomplish it a accepted best in some broker circles.

This, in a nutshell, is AMEX and what the aggregation does.

It doesn't booty a clear brawl to accept that aback bodies stop activity out to boutique - alike if they abide arcade at bargain volumes from home - companies like AMEX are appealing abundant activity to ache some austere abasement in their business.

In fact, the latest abode acquire been some accomplished examples aloof as to how a aggregation like AMEX is impacted by a all-around communicable or accident which armament bodies to break at home to a beyond degree. Booty a look.

(Source: AMEX 2Q20 Presentation)

While the accretion in announcement is ongoing, there is no abstinent that we're attractive at a significant, double-digit bead in business volumes. Agnate to any banking company, AMEX reacted to this by shoring up their clamminess and, in layman's terms, architecture floodwalls. While aggregation loans and receivables are bottomward for the aboriginal time in abounding years...

(Source: AMEX 2Q20 Presentation)

... it's absolute important to point out that AMEX never during these abode absolutely was a loss-making array of company. And aback I'm talking about shoring up clamminess and architecture floodwalls, we're of advance additionally talking about accident provisions, afresh agnate to a bank.

(Source: AMEX 2Q20 Presentation)

When we attending at things like this, AMEX YoY after-effects alpha authoritative added sense, and we get added argumentation abaft those numbers. AMEX's argumentation for these accident accoutrement and reserve-building assumptions are a continuing unemployment amount of over 10% activity into 4Q20, with a abeyant GDP abbreviating of abrogating 4% in 4Q20.

Revenue advance has taken a bound off a bluff and is now at abrogating 23% YoY acknowledgment to COVID-19. Afore COVID-19, it was at an 11% YoY acquirement growth. The actuality that agenda fees are the abandoned account if we attending at acquirement performance, that's up, tells its own tale. The aggregation is currently adversity a 2Q20 8% abatement in net absorption income, the affliction in over a decade, bottomward from a 14% access in 1Q20.

The account continues to expenses, which includes items such as cardmember rewards and services, i.e. how bodies absolutely use their AMEX cards. Rewards are bottomward about 50%, and casework are bottomward 63%. While costs bottomward are good, it's not acceptable if it's a absolute aftereffect of lower affiliate spending.

Now, to the positives.

(Source: SalesForce)

The aggregation has apparent a about 300 bps advance in its CET-1 ratio, as able-bodied as a near-doubling of its banknote and advance admeasurement in beneath than 3 quarters. As such, the aggregation hasn't absolutely been abandoned but has fabricated assertive to adapt for what they accept may come. Remember, AMEX needs to abandoned acquire a 6.5% CET-1 arrangement to be advised a well-capitalized aggregation - they acquire added than alert that today. Alike during the banking crisis, CET-1 fell to no lower than 9.8%, which gives the aggregation accomplished basic for any eventuality.

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Recent account items apropos write-offs and delinquencies that acquire appear in during COVID-19 assume to allotment the all-embracing airy and absolute attributes of the market, however, as the company's net write-off was up no added than 30 bps YoY, and delinquencies absolutely fell to 1.4% (10 bps YoY). The aggregation additionally went advanced and bankrupt its chump communicable abatement affairs at the end of June.

The actuality is, abounding analysts and writers accepted a storm adjoin acclaim agenda issuers like AMEX. This is not happening. The expectations from analysts now is, in fact, that assets builds during 3Q20 may end up absolutely a bit beneath than expected.

There are a lot of abrogating or rather bendable sentiments apropos AMEX overall, that I appetite to authorize with a few facts.

(Source: Welt)

First of all, AMEX has some absolutely accomplished acknowledgment numbers - I'm not talking"okay," but accomplished ones. AXP averages an calmly 20% acknowledgment on equity, which is "up there" in the banking world. Alike during the banking crisis, allotment on disinterestedness acquire never been negative, and the affliction was aback in 2017, aback the aggregation had "only" a 14% RoE. As it stands now in agreement of LTM numbers, the COVID-19 numbers acquire abandoned appear bottomward to 18% - admitting this may acceptable trend lower.

Secondly, debt. It's 0.3X of capital, which is able-bodied beneath abounding financials as well. It's not as acceptable as its abutting peers, MA and V, but it's absolutely there.

Third, the aggregation has retired about 20% of its outstanding shares over a aeon of 10 years while at the aforementioned time carrying rather absorbing sales increases.

(Source: SimplySafeDividends)

The point of this area of the commodity is establishing how the aggregation has done historically - and I accept we've done so here, and that performance, above-mentioned to COVID-19 and in ahead demanding situations, has apparent agnate absolute improvement already the crisis is over.

Let's move on to the amount of the matter.

For me, it consistently boils bottomward to what I'm, in the end, accommodating to pay for a company.

I'll abstain affairs a aggregation not because it's bad, but because it's too expensive. I currently accede both aeon V and MA to be awfully overvalued, alike admitting I accede them to be accomplished companies.

AXP, aback beheld at a quick glance, is on the added hand, not overvalued.

(Source: F.A.S.T graphs)

We're attractive at the world's 4th-largest acclaim agenda aggregation trading at a abounding boilerplate P/E of 22X - admitting this is based on 2020E results. There's no agnosticism that 2020E after-effects will absolutely be poor, but I accept it important to adapt these somewhat, accustomed the backlash that's accepted to appear in 2021 and onward.

If convalescent to somewhat accustomed levels in 2021-2022 and forward, an advance in AXP, based on an accepted EPS of $6.94 for 2021 and $9 for 2022 would aftereffect in anniversary assets of 13.60%, based on a 2022E P/E of 15X, which is area the aggregation has traded during bigger times. AXP, alfresco COVID-19, has a absolute history of either hitting analyst estimates or assault them calmly (more than 10%) afterwards 2009.

Even if we bisect the company's accepted advance amount from about 10% to beneath than 4% until 2025, a 4% anniversary EPS advance amount afterward 2022 would aftereffect in anniversary ante of acknowledgment of about 9% until afresh - afresh based on a abounding boilerplate 15X trading multiple.

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I appearance the $9 EPS in 2022 as conceivably a hardly too bullish number, as I accept traveling challenges may abide able-bodied into 2021 and alike 2022. However, I appearance a acknowledgment to about accustomed business levels of ~$7 EPS for 2021 as adequately valid, accustomed that it's still a bead from an FY19 $8 EPS which I appearance as accurately apery some of the company's challenges apropos its biking and auberge segment. It, again, doesn't booty a clear brawl to apprehend that until biking & entertainment/lodging sees some axiological recovery, AXP balance and numbers will abide challenged. My abiding amount ambition for AXP, therefore, is a bargain 2021-2022 P/E assorted of 15X based on a $6.5-7 EPS, which gives us a allotment amount ambit of $97.5-$105/share. This includes what I accept to be a adequately astute apprehension for recovery.

Based on these projections, AXP could either be advised hardly overvalued, adequately valued, or acutely hardly undervalued. I appearance the aggregation as added or beneath adequately admired at about ~$103/share.

(Source: Unsplash)

The bullish apriorism hinges on a acknowledgment to added or beneath accustomed operations for AXP. While not abundantly undervalued alike with commendations to operations during acceptable times - AXP tends to be admired at an balance assorted about ~15X - the actuality is that AXP is undervalued if we accede it acceptable that the company's advance aisle continues in band with absolute norms. The actuality that you're able to get a 13-15% abeyant anniversary amount of acknowledgment on a acclaim agenda aggregation should be acumen abundant to accomplish you absorbed in the aggregation - as we're usually attractive at abundant abate abeyant increases aback examination businesses such as these.

Investors assume to acquire a addiction to belittle AXP's adeptness to acclimate the advancing storms, and acutely belittle the absolute absolute abeyant of accretion in biking and entertainment. How do you anticipate AXP would do already these segments acknowledgment to pre-pandemic levels and AXP is trading at a assorted pointing to conceivably 50-70% of the accepted EPS of its absolute potential? That would accommodate not abandoned anniversary advance based on annual EPS advance but a absolute absolute abeyant antique to a added authentic balance assorted (based on an EPS of $8-$10 in the medium-term future), as adjoin to trading at a 15X assorted based on a abundant lower balance number.

The aggregate of these potentials accumulated with rock-solid clamminess and assurance metrics point to a absolute and absolutely potentially assisting apriorism for American Express.

(Source: Unsplash)

The buck ancillary has some acceptable arguments too, however.

AMEX's overreliance on travel, hotel, and agnate costs is a amount and accomplished one - these segments acceptable won't balance 100% into 2021, and this will annoyance AXP like a millstone. The key catechism to AXP's accretion and absolute allotment over the continued appellation is a acknowledgment to course for these segments - and bears would altercate that no amount how you circuit the balderdash thesis, all of these absolute scenarios accommodate a too-high assurance on a post-pandemic travel/entertainment accretion that may not occur.

If this does abort to occur, the affair could become that balance abide to see burden over the advancing abode (and years), which would announce that the company's accepted 2020E P/E arrangement of added than 22X isn't aloof a accident - but becomes the trend for 2020 and 2021 - and AXP isn't account 22X earnings, which would aftereffect in a antique in the added direction.

The buck altercation hinges on the perceived abridgement of accuracy in a post-pandemic reversion, area they would altercate that the appraisal for the aggregation in actuality could be apparent as far too high. The stock, at this valuation, should accordingly be abhorred until it drops to a akin that makes added faculty application the 2020E EPS as a baseline for how things may attending for the abutting few years.

My apriorism acutely agrees added with the bullish view. While I appearance the bearish appearance as valid, I attending at how things are developing nationally and internationally. With vaccines actuality developed, no country absolutely in "lockdown" anymore (though break measures are in effect), I accept it to be abandoned a catechism of time until things accessible up aback to normal. In Sweden, things never bankrupt down, and we're not seeing masks or ascent cases anywhere.

Granted, we assume to be in a somewhat different position with cases trending against beneath than 100/day in a few weeks if the affective boilerplate continues to move as it has. At the aforementioned time, nations like France and Britain are seeing a bit of a "second wave" array of spike. Still, alike in these nations, I accede things to be acceptable to about-face already vaccines are sorted - and I don't see this dabbling for absolute long, into 2021. Actuality that I see a accretion acceptable in 2021, and I apprehend traveling to aces up again, I appearance this as bullish for AXP, and an altercation in favor for its advancing recovery.

That's not alike advertence that I appearance the US as acceptable to balance quicker accustomed its warp-speed vaccine action and states absent to accessible aback up. The US is, afterwards all, the aggregation articulation seeing added than 50% of AXP's revenues as things stand.

Because of this, I appearance AXP as the abandoned acclaim agenda aggregation which, compared to MA's and V's P/E valuations of about 47X and 40X respectively, can be advised to be in any amount adequately admired or undervalued. Since I appetite to own banal in all of the three, I appearance this as a acceptable time to advance added in American Express.

Thank you for your time.

At about "fair value" with a ambition ambit of ~$97-~$105/share, I appearance American Express with a "BUY" stance.

Disclosure: I am/we are continued AXP, V, MA. I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I acquire no business accord with any aggregation whose banal is mentioned in this article.

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Additional disclosure: While this commodity may complete like banking advice, amuse beam that the columnist is not a CFA or in any way accountant to accord banking advice. It may be structured as such, but it is not banking advice. Investors are appropriate and accepted to do their own due activity and analysis above-mentioned to any investment.

I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles.

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