American Express 2020 Stock Price

As I promised you in my article series on Owner Earnings Part 1 and Part 2, I would share a full price estimation of an actual public-listed company. For today’s article I chose: American Express!

Disclaimer – this article is by no means a recommendation to buy/sell stocks of American Express. It is merely a means to share my views on the company, its business operations and position in the travel/hospitality and financial services industry, and finally my considerations on its financial positions (i.e., earnings and “fair” valuation).

Quick Recap

To estimate a fair stock price based on Owner Earnings is important for you to get familiar with annual reports.

This is the place where you find all relevant financial and managerial information about the company you’re interested in. Annual reports are published by every public company as a duty towards their shareholders, who want to be brought up to speed with the latest developments and financial performance. The reports are usually published between 3 to 6 months after the end of a fiscal year (December 31). In other words, they give an overarching picture of what the company when through in a year time, and you as an investor get to take a look in the recent past at financial performance of the company you put your money in!

Of the annual report, I would recommend to read:

the letter to shareholders, found at the very beginning of the report,
the market analysis, explaining the company’s position in the industry, the competitors, their risks etc.
the consolidated statements, describing the company’s financial position, cashflow and balance sheet.
the notes to the consolidated statements, giving more information on how some of the quantities in the consolidated financial statements are calculated. For example, what’s actually taken into account in the net income?

What You Need to Estimate Fair Stock Price

Of the pages of the annual report I shortlisted, here’s what you really need to estimate a fair stock price for the company you’re interested in:

Pre-Tax Income, found in the consolidated statement of income. Note that the pre-tax income = net income + income taxes paid by the company;
Depreciation and Amortization, found in the consolidated cashflow statement;
Account Payables and Receivables (Net), found in the consolidated cashflow statement. Note that payables and receivables may also be found in the balance sheet in their absolute amount, in which case you’d have to calculate the net different yourself!;
Maintenance Capital Expenditures (CAPEX) or equivalently Purchase of Property and Equipment, found in the consolidated cashflow statement and notes to consolidated financial statements. Check my cheat sheet to estimate the maintenance CAPEX in this article!

With all this information collected from the annual report, you can now estimate the owner earnings, and a fair price you’d be willing to pay for the company. How? Like so.

Owner Earnings	=
Pre-tax income	+
Depreciation and amortization	+
Account payables (net)	+
Account receivables (net)	+
Maintenance capex

Note that some of these quantities may be negative!

Estimate of a Fair Stock Price for Amex

Let’s run the numbers for American Express, and compare the estimate based on Owner Earnings to their market price of $109 as of June 7, 2020. The important question to keep in mind is – is that price high/low/in range compared to the company’s earnings?

I’m gonna go ahead now and open the Amex 2019 Annual Report, and I’m gonna show you where to find all the elements you need to calculate a fair estimate of the stock price. Not THE only price estimate out there, but a first one based on the company’s earnings.

What you need to know	Where you find it
Pre-tax income	Consolidated Statements of Income, Page 79
Average common shares outstanding	Consolidated Statements of Income, Page 79
Depreciation and amortization	Consolidated Statements of Cash Flow, Page 82
Account payables and receivables	Consolidated Balance Sheets, Page 81 (Total Value) Consolidated Statements of Cash Flow, Page 82 (Net Value) Notes to Consolidated Statements, Page 84 – 132
Maintenance capex	Consolidated Statement of Cash Flow, Page 82 Notes to Consolidated Statements, Page 84 – 132

If you have no idea what these things are, check out my article on Owner Earnings Part 2 where I cover what each of these quantities are and why they are important for the calculation of a fair stock price.

Pretax Income

This is the net income + income tax. You either do the sum yourself or you (sometimes) can actually find the Pretax Income already carried in the Consolidated Income Statements. And guess what? It’s your lucky day, because Amex has already given that.

$ 8,429 millions (that’s 8.4 BILLIONS!)

To make their statements easier to read, it is very common to shorten the numbers and approximate up to thousands or millions, depending on how much the company is generating. In Amex’s case, they round everything up to the millions.

Average Common Shares

This value is also in the Consolidated Income Statements on Page 79. In 2019, Amex issued:

828 million common shares

This is an average number, because during the year the amount of share might change due to buybacks, issuance of extra shares etc.
An average throughout the year is good enough.

Depreciation and Amortization

Easy one, go to the Consolidated Statement of Cashflow on Page 82 and you’ll see Depreciation and Amortization being carried at:

$ 1,188 millions

Account Payables and Receivables

Here’s my cheatsheet to estimate this value.

Go first to the Consolidated Statement of Cash Flow on Page 82. Often times, companies state here the net amount of account payables and receivables. As easy as it gets!
If not, you can ALWAYS find the absolute value of account payables and receivables in the Consolidated Balance Sheets. However, in this case, you need to calculate the net value yourself! Don’t forget to to that, otherwise, you’ll be WAAAY off with your price estimate. Don’t worry, there will be an article dedicated on the Balance Sheets and how to get the net account payables/receivables. Stay tuned!

For now, you just need to know that Amex puts their Account Payables and Receivables in their Balance Sheets on Page 81. The net values are:

Account Payables (Net) = $483 millions
Account Receivables (Net) = ($1,474 millions)

Important Fact!

In accounting, a number indicated between brackets is a negative number which means it’s going OUT of your account.

Maintenance CAPEX

Maintenance CAPEX are always the tricky part. I have a cheatsheet for you on my article on Owner Earning Part 2. I’ll keep it short for the sake of this discussion, the numbers you need are on the Consolidated Statement of Cash Flow on Page 82. In particular:

Purchase of Property and Equipment = ($1,645 millions)
Other Capital Expenditures = ($354 millions)

American Express Fair Stock Price

Finally, I can answer the question: what is a fair stock price for American Express?

Remember this is just ONE of the price estimates that you will do when assessing a company. This is one of the quickest because it is only based on what the company is earning NOW! It doesn’t require any historical data or detailed knowledge of the market to estimate growth rates etc. I’ll share these other methods later on my blog!

What you do now – you add up all the quantities I have just given you from the annual report and divide them for the average common shares.

Watch out!

Some of the numbers are negative! Adding a negative number means subtracting it. Don’t ask me why this s*#t is arranged this way haha

Fair Stock Price (Earnings-based)

Here’s how you calculate it:

10 x Owner Earnings
Average Common Shares

This equals $84.31.

So what?

Well, Amex is selling now at $109. The price I’m willing to pay has to be lower than the one based on Owner Earnings. The criteria will be even clearer when I share the other pricing methods.

When I did my first estimate in February, Amex was trading at $71, because of the impulsive reactions of investors around the world to the onset of the corona crisis. And that’s when I bought it!

Little disclaimer here. Pricing considerations are not the only ones that drive an investment decision. They are crucial, because you wanna make sure you pay a fair value for the company. However, there are qualitative considerations (on the company, its position in the market and overall industry) that are just as important.

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Disclosure

These are unqualified opinions, and this newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor, and do your own research.