Strong Results From Undervalued American Express

Jim Sinegal: American Express reported strong results this quarter with double-digit growth in billed business, double-digit growth in loans, and double-digit growth in revenue. At the same time, the tax cuts helped them out, and an extensive program of capital return over the last year helped them generate earnings per share growth of 38% over the course of the year.

American Express is still facing some headwinds. Their partners, hotels, and airlines are demanding more in payments for their co-brand relationships. Merchants are demanding lower prices, and rewards competition is still fairly intense. However, the strong economy is helping them to grow despite all of that. Consumers are spending. Unemployment is low, and loan-loss rates are very low, and consumers are once again willing to borrow. We also like that American Express is refocusing on its strengths.

Those include relationships with corporations, relationships with merchants, and the ability to gather data from its customers. Its new strategies are still in the very early stages. American Express has only had a few months under the new CEO, but we think over time, they will pay off.

We also think American Express is relatively undervalued in the financial space. It's trading at about a 10% discount to our $112 fair value estimate and only about 14 times the midpoint of management's guidance for 2018.