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American Express due diligence

Hatchworks has conducted due diligence on The American Express Company, also known as Amex. American Express issue and process prepaid, charge and credit cards primarily for travel (hotel, ticket, restaurant etc) payments. Their cards are available to corporate consumers, individuals and small businesses around the globe.

American Express offer both credit lending and network processing services which gives it an advantage over its competitors. American Express Company cards include cards issued by American Express, as well as cards issued by third-party banks and other institutions that are accepted by merchants on the American Express network.

American Express (AXP) divides its operations into three large segments:

Global Consumer Services Group (GCSG) — 50.1% revenue comes from ‘’GCSG’’ who primarily issue a wide range of proprietary consumer cards globally. The pandemic has battered the global economy, hurting consumers’ ability to make payments on their credit cards.

Global Commercial Services (GCS) -28.8% revenue comes from ‘’GCS’’ who primarily issue a wide range of proprietary corporate and small business cards and provide payment and expense management services globally.

Global Merchant and Network Services (GMNS) — 14.1% revenue comes from ‘’GMNS’’ who enter into partnership agreements with third-party card issuers and acquirers, licensing the American Express brand and extending the reach of the global network.

The pandemic has hammered the global economy, hurting consumers’ ability to make payments on their credit cards. Also, lots of SME’s are in financial distress due to Covid-19 and the temporary economic lockdown. SME’s that are using American Express, pay a certain fee/interest for their service. This could hurt American Express profitability over time, which is already evident in their Q1 results; namely a 76% drop in first-quarter profit as a result of it setting aside $2.6B to cover potential losses stemming from the Covid-19 outbreak. However, American Express still expects a solid revenue growth of 11.2% for 2020E and 2021E.

Headquartered in New York, United States, American Express is listed on the New York Stock Exchange, under the symbol ‘’AXP’’.

Financials — American Express
(Source: Marketscreener.com, investing.com)

American Express current market cap is $76.5B and stock price is around $98.24.

With a predicted net-income growth of 120% for 2020E and 2021E, and a net income estimate for 2021E of in excess of $5.5B, this points to a P/E ratio of 13.3x.

The revenue/sales forecast is $42.1B for 2021E, indicating an EV/Sales ratio of 1.80x.

In terms of profitability, an operating margin of 30.4% is predicted for 2021E. This is moderately higher than competitors such as, Visa (V) for example, who has a lower operating margin of 15.1% for 2021E.

American Express (AXP) is a yielding equity with a yield of 1.92% for 2021E.

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Last updated 27–05–2020.

It is worth noting that, after the previous recession, the share price made a drop of 27.1%. It’s still very uncertain how the Covid-19 pandemic will play out over time; there is currently lots of speculation circulating about a potential vaccine for the virus and a potential second wave that might occur sooner or later.

With a big market cap around $76.5B and a stable dividend history, track record, along with strong, diversified operation segments, makes American Express (AXP) far less likely to be pulverized during an economic downturn, and should even continue to pay regular dividends in a recession.

According to our analysis, American Express shows decent fundamentals with a strong estimated net-income growth, relative to its rivals MasterCard and Visa. Also, American Express is one of only a few financial service companies in the industry that has the capability to both issue and process electronic payment cards, ensuring it retains a strong position in the market sector. As a result, Hatchworks maintains its ongoing position in American Express with a long term view.

The Hatchscore is 6.3 out of 10. Full details can be found on Hatchnet: www.hatch-net.com/companies

What is American Express?

The American Express Company, also known as Amex issue and process prepaid, charge and credit cards primarily for travel (hotel, ticket, restaurant etc) payments. Their cards are available to corporate consumers, individuals and small businesses around the globe. American Express offer both credit lending and network processing services which gives it an advantage over its competitors.

Big Investors:

  • Berkshire Hathaway, Inc.
  • The Vanguard Group, Inc.
  • Wellington Management Co.
  • BlackRock Fund Advisors.

Advisors and Bookrunners:

  • Barclays.
  • Bank of America.
  • HSBC.
  • Wells Fargo.

What are the risks?

  • Global economic, political and other conditions may adversely affect trends in consumer spending and in travel.
  • Regulation in the areas of consumer privacy, data use and security could increase running costs and decrease the number of charge and credit cards issued.
  • If the rate of interest at which American Express pay on their borrowings increases more than the rate of interest they earn on loans, their net finance charge revenue, and their net income, could see a decrease.
  • Competitive pressure may impact the prices American Express charge merchants who utilize their cards for payment for goods and services.

Competitors:

  • MasterCard. (MA)
  • Visa. (V)
  • Discover Financial Services (DFS)

Management team:

  • Stephen Squeri: Chairman & CEO.
  • Jeffrey C. Campbell: CFO & Executive VP-Finance.
  • Richard Petrino: COO.

The Hatchworks Team

The forecast figures are based on the data of Marketscreener.com, and not from hatchworks: https://www.marketscreener.com/AMERICAN-EXPRESS-COMPANY-4814/financials/

Legal Disclaimer — This report summary has been generated as a result of Hatchworks’ proprietary company vetting and filtering system. The level of due diligence conducted on investible assets conducted ranges from mediocre to significant, the latter being the case where Hatchworks has explicitly taken strategic positions in. By no means is the information in this file to be relied on as investment advice; this includes Hatchworks’ algorithmic composite score known as ‘Hatchscore’. Hatchworks has not received any compensation for this research. For more information you can reach us at info@hatchworksvc.com. This report is not for distribution in the United States of America. It is closed to U.S citizens. If you are a U.S. citizen, you should delete this report or return to sender.

Written by

Heading up the group’s R&D activities for Hatchworks.

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