American Express (AXP) Valuation Gap Presents an Opportunity - Bernstein

Bernstein analyst, Kevin St. Pierre, sees upside in shares of American Express (NYSE: AXP) as the gap between the forward P/E derived value and the sum of the parts value is greater than it has ever been in the past. Assuming the company can get back to a normalized growth rate, the company could appreciate to the $77 PT.

"On average and over time," AXP's relative multiple versus the SOTP multiple has been 100%, implying that the stock has generally traded in-line with its sum-of-the-parts valuation. However, we have seen a divergence since mid-2015, with AXP now trading at 9.9x, or 75% of what we would expect given their sum-of-the-parts valuation (13.2x). This 75% relative P/E is the lowest multiple AXP has traded at over the past 10 years. What's more, with the recent sell-off of the card issuer stocks (65% weighting in our SOTP), the SOTP multiple is trading roughly 10 percentage points below its long term relative P/E (versus the S&P 500) of ~100%.

If AXP were to return to its current SOTP implied valuation of 13.2x, the stock would trade at $71, which represents roughly 30% upside to its current price. On top of that, if the SOTP multiple were to return to a more normal 100%, that would drive the stock to 14.8x, or closer to $80, representing roughly 50% potential upside.

EPS growth of 12+% will be achievable beyond 2017 as AXP gets back to turning the "6-4-3": 6% revenue growth, 4% expense growth, and 3% share repurchases. Unfortunately, the expenses is currently a problem as it seeks to replace co-brands with core business. Applying a market multiple on 2017 EPS estimates, plus $2 per share in excess capital is the source for the $77 price target,

For an analyst ratings summary and ratings history on American Express click here. For more ratings news on American Express click here.

Shares of American Express closed at $54.15 yesterday.

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