Recently, American Express has been going through a tough time. Due to rising competition from large banking conglomerates including J.P. Morgan and a tough US dollar, the company missed analyst expectations for revenue by $260 million during the first quarter. American Express even lost one of their large sources of credit card sign ups due to ending a partnership with Costco. Because of all of the challenges that the company faces, American Express has recently underperformed the market. Year to date, the stock is down by 12%, and it is currently one of the worst performers on the Dow Jones Industrial Average.
Although American Express stock has recently underperformed, Warren Buffett, the company’s biggest investor, is still on their side. American Express is one of the four big positions in Berkshire Hathaway and Warren Buffett’s portfolio, and the company currently owns more than 151 million shares of American Express. There’s no question that Buffett knows a thing or two about investing in financial companies. He bought preferred shares of Goldman Sachs when everybody believed that the financial system was on the verge of collapse. He bought shares of Bank of America for seven dollars in 2011 when everyone was down on the company. He made billions of dollars on each of these investments in banks. The greatest investor in the world, Warren Buffett, recently had much praise for American Express; saying that the company is “one special company” that historically has been very successful when it comes to adapting financial innovation in the banking sector.
Many other investors agree with Warren Buffett. Many hedge funds own significant stakes in American Express. Fisher Asset Management owns 11.3 million shares, while First Eagle Investment Management also owns 11.7 million shares. According to recent filings, American Express insiders certainly like the company. Ronald Williams, an American Express director, recently purchased 13,585 shares at the average price of $80.98 per share.
You can generate significant alpha by following the picks of company insiders and hedge funds. Recent research shows that the 15 most popular small-cap stock picks among hedge funds have actually outperformed the market by close to a percentage point per month between 1999 and 2012. These stocks have managed to return an average of more than 132% in the last 2 ½ years, and they have even outperformed the S&P 500 index by close to 80%.
American Express already has a turnaround plan in place. They have every intention to offer better rewards to customers in order to compete with companies like J.P. Morgan Chase. They also plan to increase their merchandise acceptance rate in order to have a way to better compete with Visa and MasterCard. American Express is currently turning to cost-cutting and financial engineering as a way to shore up the stock price. Management has every intention to reduce the workforce by 6%, and this is an effort to lower SG&A expenses. Once all of these money-saving efforts are put into place, American Express then has a plan to buy back more than 150 million shares of its stock, which comes to about 1.5% of the float. Lastly, they even plan to use some of this money in order to fund a dividend increase to reach a per quarter amount of $0.29 per share.
It’s probably not the best idea to bet against American Express for the long-term. The company is certainly going through a soft patch at this time, but American Express has a large moat and a 28.6% return on equity. There are also many loyal American Express customers, and the AMEX card is still one of the most widely held credit cards in households with $1 million or more in investable assets. With the United States economy steadily recovering and the stock market at its all-time high, management and American Express will most likely have plenty of time to implement new policies that will get profits at the financial institution growing once again.
If management does succeed in growing revenue and profits again, American Express is currently a good buy. The company could very well trade for a forward PE of 17, if the turnaround is a success, instead of the current forward PE of 14.2. That gives 19% upside to the American Express stock.
- American Express stock is currently down by 12% year to date and lags the market.
- Warren Buffett still strongly believes in American Express, and Berkshire Hathaway currently owns 151 million shares.
- Warren Buffett believes that American Express will have no problem adapting to the new financial environment, just as the company has done throughout other points during its history.