Tuesday, January 30, 2007

A Reminder on American Express

I thought it would be a good time to remind readers what Joel Greenblatt had to say about American Express (AXP) last summer. Although I haven't done the valuation work yet and thus haven't invested in AXP, there are 2 things I do know: (1) American Express is one of the few really great businesses in the world; and (2) Joel Greenblatt is one of the greatest investors in the world.

At the Ira W. Sohn Investment Research Conference last year, Mr. Greenblatt presented his investment thesis for American Express. He stated that he believed the company would earn between $3.70 and $3.75 per share in 2008 and is conservatively worth 20-22 times earnings. That would give a share price 2 years out of mid-$70s to low-$80s. He also mentioned the fact that American Express only has to reinvest about 25% of its earnings for growth, so they get to give shareholders back 75% of their earnings, either through stock buybacks or dividends.

So, although AXP is up from the $51-$52 share price last summer, the recent pullback and current price of about $58 per share certainly looks like something worth taking a further look, especially since AXP is still growing its intrinsic value at a very attractive rate. Afterall, the earnings yield is pretty close to the risk free rate and if that is anywhere close to your opportunity cost, which one would you rather own?

*This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.