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  • Miriam McDonough Introduction to Investments Dr. Robert LeClair April 8, 2002
  • Table of Contents Background of American Express Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Ratio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 – 4 Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Intrinsic Value Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio Comparisons Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Financial Statements Appendix C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Size Financial Statements Appendix D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Projections Appendix E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography
  • American Express Company began serving its customers in 1850 and has been building a strong, well-known name ever since. It provides services throughout the world such as travel-related services, financial advisory services and international banking services. The company offers products such as financial planning, brokerage services, mutual funds, insurance and other investment strategies. They also provide individuals with charge and credit cards, travelers’ cheques and other products. The following report is an analysis of the company’s ratios, financial statements, and earnings estimates. Performing a ratio analysis, I am able to look at the value of American Express Company and in some cases compare it to that of the industry. By calculating and analyzing ratios from five different areas such as profitability, liquidity, efficiency, debt management, and market value, I am able to see that American Express has suffered in a number of different categories. But despite American Express Company’s great losses, analysis also shows that there is a strong possibility of a healthy and prosperous future in store for American Express. Looking at profitability ratios, specifically the profit margin, I found that American Express Company’s profitability has declined significantly from 2000 to 2001. The profit margin indicates the rate of profit from sales and revenues. During 1999 and 2000, American Express had a relatively high profit margin, but decreased from 11.8% to 5.8% between 2000 and 2001, and is significantly lower than the industry that is currently at 8.9%. This shows that 2001 was a very hard year American Express. Other aspects that measure profitability for a company are return on assets and return on equity. Both of these measurements support the profit margin indication that American Express’s profitability has drastically decreased from 2000 to 2001. The ROE shows how
  • profitable a company is in comparison with the industry. From 2000 to 2001 the ROE dropped from 24 to 10.9, while the industry average rose to 25.63. This shows that the return on equity for American Express is 135% less than the industry average, indicating that the profit level of American Express is 135% less then the other companies in the financial services industry. The ROA indicates what earnings were generated from invested capital. The ROA for American Express is currently half or .91 less than the industry that is 1.81; while in 1999 and 2000 the ROA for American Express was very close with the industry average. This is also showing, like the ROE, that there is an enormous gap between the profits of other companies in the financial services industry and American Express. The profitability ratios show that American Express is literally half as profitable or less than half as profitable as its competitors. Using the current ratio, which is one of the liquidity ratios, the ability of American Express to meet it daily operating expenses and short-term obligations can be measured. The current ratio for American Express has increased from 1999 to 2001 by . 27. This shows that the company has been meeting its obligations faster and more efficiently. In other words, the company has become more liquid. The quick ratio for American Express is the same as its current ratio because the company does not hold any inventory. The quick ratio is a measure of how fast a company’s assets can be turned into cash. It also measures a company’s financial strength. Because it has grown by more than .2, the quick ratio indicates that the strength of American Express is growing. Although the financial services industry does not provide averages for liquidity ratios, it is assumed that a number between one and two is acceptable, and as always, if it is moving in an optimal direction, it is favorable.
  • Efficiency ratios are used to evaluate the overhead structure of a financial institution. These ratios measure how efficient and therefore how profitable a company is. The total asset turnover has increased very slightly between 1999 and 2001 from .14 to .15. Although this is still .05 less than the industry (which is currently at .2), it does show that the efficiency and profitability of American Express is moving in a positive direction. Another measure of efficiency is receivables turnover. This ratio portrays American Express moving in a negative direction. The financial service industry does not provide an industry average for the receivables turnover ratio, but by looking at the numbers from 1999 to 2001, it is seen that the return per dollar has been decreasing, which indicates a decrease in profits. Analyzing debt management ratios, I looked at the debt/equity ratio and the performance of American Express in relation to the industry. The debt/equity ratio measures a company’s financial leverage, i.e. how much debt and how much equity a company uses to finance its assets. A higher ratio indicates an aggressive investment in assets using debt. American Express has been increasing its debt usage but is still enormously behind the industry average. This could and is having a very strong affect on profits. The total debt ratio is also used in measuring management specifically risk management. Like the debt/equity ratio, the total debt ratio indicates how much a company finances its assets using debt and in return measures a company’s risk. American Express’s total debt ratio has been slightly decreasing and therefore shows again that the company does not use much debt to finance its assets and therefore has a very low risk rating.
  • Finally I looked at market value ratios. In contrast with the profitability, liquidity, efficiency, and debt management ratios, the market value ratios paint a brighter picture for American Express’s future. For instance, the P/E ratio for American Express is extremely high. It has grown from 24.8 in 2000 to 41.5 in 2001, which is a 67.3% increase, and it is 71.5% higher than the industry average. This could mean big things for the future of American Express. The high P/E ratio most likely means high projected earnings in the upcoming years. The book value per share ratio shows that the book value of American Express’s stock has been increasing since 1999, when it was $7.52. Currently it is at $9.04, which is still below the market average, but again, is moving in a positive direction. Viewing the common size financial statements, it is clear that the net income for American Express has dramatically dropped between 2000 and 2001. From 1997 to 2000, the net income averaged 11.5% of sales, but in 2001 it dropped to a low 5.8% of sales. During the 1990s and into the 21st century, American Express carried out various business process adaptations that would allow for a lessened dependency on the overall market condition and a lessened dependency on revenue for achieving and delivering targeted earnings. Still, with these changes occurring there has been a consistent number of shares outstanding, above $1.3 billion for five consecutive years. Working to make the company more efficient, combined with the weak economic conditions in recent years has caused American Express’s total assets, liabilities, and equity to decrease. The year 2001 was undoubtedly a hard year for American Express Company, and there are many obstacles that stand in the way of American Express Company’s growth and prosperity. But they are showing a strong front and are planning on using their
  • strong name, their resilience, and competitive foundation to pull through the hard times. While they were unable to meet financial objectives previously set for 2001, American Express has made some business changes that are sure to bring about an impressive recovery. Using a fundamental analysis, I was able to determine an intrinsic value for American Express Company’s stock for the year 2004. First I determined the dividends for the next three years by using a growth rate of 5.54% to be $.34, $.36, $.38 respectively. I then calculated the average earnings per share average growth rate and the price to earnings average growth rate. Using these growth rates, I found that the expected EPS for the years 2002 through 2004 are $1.034, $1.092, and $1.152 respectively. Performing similar calculation the expected price to earnings ratio is found to be 50.98 for 2002, 62 .63 for 2003, and 76.65 for 2004. In order to find the stock price for American Express Company in 2004, I used the P/E Multiple Model. This model gave me a stock price of $88.30. Taking the stock price, and the expected dividends for 2002, 2003, and 2004, I find an intrinsic value for the American Express Company stock to be $89.37 in the year ending December 31, 2004. I realize this is very high expectations considering the last year devastations, but American Express’s high P/E indicates that there will be strong growth for the company, and that investing in American Express has the potential to be extremely profitable for those who are willing to tough out the hard times and wait a little bit longer to reap the benefits of patience.
  • Bibliography American Express Company Website. www.americanexpress.com MSN Money. www.moneycentral.msn.com Multex Investor. www.multexinvestor.com Securities and Exchange Commission. www.sec.gov Yahoo Finance. finance.yahoo.com