Valuation analysis for American Express Company (NYSE:AXP)
According to our combined analysis for American Express Company (NYSE:AXP) , at current levels the stock is pressing the boundaries of what we would consider to be fair value. This article attempts to identify fair value for American Express ahead of earnings.
Our definition of fair value focuses on an earnings driven approach which excludes onetime events and focuses on complete earnings cycles to define truer growth rates. We use a PE multiple comparison to gauge relative value compared to earnings growth, but our analysis is not strictly fundamental. In addition, we offer technical observations that help identify precise entry and exit levels.
To begin, our yearly growth rate chart for American Express identifies earnings growth that has recently been hovering around 10%. In many ways this represents a solid growth rate, but in calendar 2015, represented by the first red dot in our graph, the growth rate is expected to decline slightly to 8.63%.
However, looking beyond 2015 to 2016 analysts are expecting a meaningful recovery and earnings growth is expected to be 13.69% as defined in the second red dot in our EPS growth chart.
That brings our attention to the PE multiple. The PE multiple has been coming down after reaching a relative peak near 19 at the end of 2013. The decline in the multiple improves valuation, and the current multiple is 14.39. That is represented by the blue bar in our PE chart, while the first red bar represents what the multiple would be if price remains the same and analyst estimates are accurate. The multiple declines to 13.79 in that case, and further to 12.66 if analysts are right about 2016.
Given the PE multiple and the earnings growth rate we are able to combine the data to define peg ratios, which in turn help us define fair value. Our definition of fair value is when a company trades with a peg ratio between zero and 1.5. Not surprisingly, the peg ratio has been declining, and it is much closer to being in our range. The blue dot in our peg ratio chart represents the current peg ratio, which is 1.52. The first red dot is what the peg ratio would be if analysts are right about 2015 and price remains the same, that's 1.6, but each of those are above our 1.5 threshold.
However, if analysts are right about their estimates for 2016 the peg ratio will drop to 0.92. This is within our range and therefore looking ahead to 2016 we would consider American Express to show value at that time if price remains the same.
That begs the question, should price remain the same?
Our technical observations suggest that American Express has not yet tested longer term support, but it has been declining from longer-term resistance. Accordingly, we expect American Express to decline more than it has already and test longer term support before stabilizing and turning higher again. Longer term support is represented by the first parameter in the longer term column of our technical summary table in our real time trading report for AXP, which includes the fundamental charts too. If that level is tested and it holds American Express will be a buy on a technical basis and probably fall into our range on a peg ratio basis at the same time.
In summary, we would look to buy American Express on weakness so long as analyst estimates for 2015 and 2016 remain the same or improve.