Should You Buy the Dow — American Express

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tdp2664 InvestorPlace Today I’ll look at American Express (NYSE: AXP ), the financial services company that does a lot more than just issue charge cards. American Express’ product portfolio consists of charge and credit card products; expense management products and services; consumer and business travel services; stored value cards, including travelers checks and other prepaid products; network services; merchant acquisition and processing, point-of-sale, servicing and settlement, and marketing and information products and services for merchants; and fee services comprising market and trend analyses and related consulting services, fraud prevention services, and the design of customer loyalty and rewards programs. One of the key driving factors regarding American Express is the health of the general economy. AXP does not earn its money by charging interest on unpaid balances, which is different from regular credit cards. Instead, it earns its money by charging each merchant a transaction fee as a percentage of each charge. These fees are higher than its competitors’. So for American Express, it really all comes down to how much money its cardholders are spending. Since peaking in 2007, American Express is about 45% below that amount. So if you are thinking of buying American Express, you are banking that the economy will continue to improve and/or American Express will seize more market share. Stock analysts looking out five years on American Express see annualized earnings growth at 10.5%. But look closer, because net income jumps 19% over last year and 4% for FY 2012, suggesting annualized growth from then to 2015 is around 8%. That’s modest and acceptable growth for a company as big as AXP. At a stock price of $47.50, on FY 2011 earnings of $3.98, the stock presently trades at a P/E of 12. MasterCard (NYSE: MA ) trades at a 20 P/E, Visa (NYSE: V ) at a 17 P/E, and Discover (NYSE: DFS ) at 8.25. So compared to its peers, it’s right in the middle. Concerning American Express’ financials: The company doesn’t carry long-term debt, but it is responsible for paying all the merchants people charge their card against. AXP owes about $41.2 billion and is due $43.38 billion in customer receivables. Coupled with the $32.5 billion it has in cash, American Express is more than covered on what it owes. Trailing 12-month cash flow was more than $8 billion, so the company generates plenty of cash. The company also had nine times the amount of free cash flow necessary to pay its 1.5% dividend. So it appears to be on solid footing financially. There have been two insider purchases of about 25,000 shares in the past year — not great, but it’s something. Conclusion Placing a 10 P/E on American Express, with projected 2015 earnings of $5.27 per share, gives us a price target of $52.70. That’s only a 10% return from here. However, the fact it generates so much cash each year — about $7 per share — means we can boost that target. Conservatively assuming $5 per share in free cash flow, we’d add $25 to the price target, which becomes $77.70. That’s a 64% increase from here, or a nearly 14.5% annual increase from here, including reinvested dividends. Finally, Warren Buffett owns 13% of the company. That reads to me as a long-term endorsement. I believe American Express is a buy for regular accounts. I believe American Express is a buy for retirement accounts. Lawrence Meyers does not own shares of American Express.