American Express Bear's Rebuttal
by Bill Barker ([email protected])

Paul finds it "out of the question" to be anything but bullish on Amex since it has a strong brand name and a "reasonable valuation." Paul also likes the fact that Warren Buffett owns 10% of the company. Let's see how these three things fit together, and see whether my being bearish on Amex isn't as crazy as Paul seems to think it must be.

It's impossible to argue against the fact that American Express is an extremely well-known brand. But charge cards are commodities -- so I don't see where the power of a brand exactly ensures customer loyalty, and indeed it hasn't. American Express has been bleeding market share for over a decade.

Paul sees the market share possibly improving for The Card as a result of the recently launched Justice Department litigation against Visa/Mastercard. As a former litigator, here's my advice on what you should do while waiting for a positive result anytime: don't hold your breath. The action most likely will take years to play out, and ask yourself who really stands to benefit from a blow to Visa and Mastercard's deathgrip on the credit card market. Amex? Hardly. Anybody who wants to get an Amex has had a million chances to pick one up already. As Paul points out, everybody has already heard of Amex. No, the beneficiary of that lawsuit, if anyone, is going to be Discover, or even some new outfit we've barely even heard of yet.

Paul finds the fact that Warren Buffett owns 10% of American Express to be a de facto recommendation for purchasing shares today. But the way Buffett came about his ownership is instructive. According to my copy of The Warren Buffett Way, by Robert G. Hagstrom, Jr., Buffett was buying shares of AXP at $25 per share in 1994 when the stubs had an intrinsic value of $87 each. Great purchase -- I highly recommend everyone out there to find a company that's selling at a 70% discount to its intrinsic value. But with a price north of $90 a share today, Amex sure doesn't provide that vaunted Buffett "margin safety" anymore.

Paul accurately reports that Amex has been steadily buying back shares of late. As to that, two points. First, the buyback has helped disguise the lack of growth in the top line. Though the earnings per share have been growing at a mid-teens clip lately, revenues are squeaking by at barely 5% growth -- and less than that this year. Second, it should be pointed out that Amex's dividend is lower today than it was in 1992, so the expensive buyback is very much coming out of shareholders' pockets.

Finally, Paul states that Amex is trading at "a below average" multiple. I find that an interesting statement. With a P/E at nearly double its historic norms and higher than its financial group peers, Amex is at a "below average multiple" only in the most strained sense of the term. I'm not willing to strain that hard. If you want to buy shares of Amex, wait until it comes back down to its historic P/E level -- somewhere around 13.

Of course, that's more than $30 a share cheaper than what American Express goes for today.

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