American Express This report is an analysis of the American Express company.

Company Background

Founder, date incorporated -- "Established in 1850 in New York, American Express Company was among the first and most successful express delivery businesses to arise during the rapid westward expansion of the United States." (American Express)

Initial source of Capital -- "Although in its early years American Express was not itself a financial services company, its largest and most consistent clients were banks. Delivering the banks' typically small parcels -- stock certificates, notes, currency and other financial instruments -- was considerably more profitable than transporting larger freight. Soon the company would scale down its parcel and freight delivery business in favor of creating and selling its own financial products." (American Express)

Key innovations -- "In 1882, American Express launched the money order business, which proved an almost instant success. The company introduced the world's first traveler's cheque in 1891 and within ten years was selling more than $6 million in cheques annually. In the course of building the money order and travelers cheque businesses, the company established correspondent banking relationships with a number of European banks that accepted and encashed the products." (American Express)

b. Primary products or services -- American Express Company is mainly in the business of providing travel-related services, financial advisory services and international banking services throughout the world.

c. The companies geographic location is: American Express Co., World Financial Center, 200 Vesey Street, New York, NY10285 Phone [HIDDEN] Fax [HIDDEN] Email: ronald. -- Web Site: http://www.americanexpress.com/

d. Primary products -- "American Express has three operating segments: Travel Related Services (TRS), American Express Financial Advisors (AEFA) and American Express Bank (AEB). TRS' products and services include, among others, charge cards, cardmember lending products, travelers' checks, and corporate and consumer travel services. AEFA's services and products include financial planning and advice, investment advisory services and a variety of products, including insurance and annuities, investment certificates and mutual funds. AEB's products and services include providing private, financial institution and corporate banking; personal financial services, and global trading." (Yahoo Finance)

e. Primary customers -- "American Express is a world leader in providing charge and credit cards to consumers, small businesses and corporations. We also began to see a solid pick-up in spending by corporate cardmembers for the first time in several years. Moreover, the number of merchants who accept American Express cards continues to grow, and we saw a substantial increase in cardmember transactions at retailers, supermarkets, gas stations, drugstores and other everyday spending locations. Our lending business also performed very well. The benefit of rewards, along with competitive offers on revolving credit products, helped drive double-digit growth in lending balances on American Express credit cards." (American Express)

f. Percent of sales from international markets -- "In 2003, we added 3.5 million new cards, bringing total worldwide cards-in-force to 60.5 million. We were among the top card issuers in both spending and lending balance growth, and had industry-leading credit quality. Worldwide billed business -- or spending on American Express cards -- rose 13%, with especially strong growth in consumer and small business spending, both in the United States and internationally." (American Express)

g. Future strategy growth -- Strong growth in our card business, outstanding credit quality, the success of our ongoing reengineering efforts, and progress at American Express Financial Advisors all played a role in our 2003 performance. For the year, we delivered: Net income of $2.99 billion, up 12% from $2.67 billion in 2002. Diluted earnings per share of $2.30, up 14% from $2.01 last year. These results were at the high end of our long-term target of 12 to 15% earnings per share growth and surpassed our long-term targets of 8% revenue growth and 18 to 20% return on equity. We were particularly pleased with our revenue performance.

h. Risks to future strategy growth -- "Return on equity of 20.6%, compared with 20.2% a year ago & Revenues of $25.9 billion, up 9% from $23.8 billion last year. Continued weakness in corporate spending and the equity markets, the war in Iraq and the outbreak of SARS all made for a highly uncertain environment." (American Express)

C. Macro Economic Influences

a. Plot the % change in stock price 1984 -- 2003 (% change real GDP, % change CPI, % change S& P. 500)

(Yahoo Finance)

b. compute the correlation coefficient between the % in stock price

i. % change real GDP, % change CPI, % change S& P. 500

U.S. Consumer Price Index Forecast All Urban Consumers 1982-1984=100.

Nov

2004

Dec

2004

Jan

2005

Feb

2005

Mar

2005

Apr

2005

Value

Standard Deviation

3.4

3.6

3.9

4.1

4.3

4.6

Correlation Coefficient

0.95

0.95

0.95

0.95

0.95

0.95

(6-Month Forecasts)

U.S. Consumer Price Index History and Forecast.

(6-Month Forecasts)

Current Economic Indicators

Indicator

Value

Inflation %

3.19

GDP Growth %

3.89

Unemployment %

5.50

Gold $/oz

Oil $/bbl

43.55

Prime %

5.00

(6-Month Forecasts)

c. based on direct and strength of these correlations, if economy went into recession in the next 6 months

i. Would...

"At year-end, our price/earnings ratio was higher than any of the top 20 global financial services companies by market capitalization, a level that indicates both the strength of our current financial performance and the market's confidence in our future growth." (American Express)
ii. How confident are you about your prediction? Please refer to statistical evidence to support your level of confidence -- In spite of a world near economic recession, American Express stock outperformed the major market indices for the second year in a row. Total shareholder return was 38%, compared with 29% for the S& P. 500 and 31% for the S& P. Financials and the future looks even more promising.

D. Industry analysis

a. Identify and describe industry stage of development

b. Market share and profitability American Express is the official industry leader with a 66% market share.

i. Current share of industry sales

Company

Symbol

Price

Change

Market Cap

P/E

American Express Co

AXP

55.91

-0.05%

70.18B

21.27

Fannie Mae

FNM

70.31

+1.46%

68.05B

9.12

Freddie Mac

FRE

70.26

-0.69%

48.38B

4.93

SLM Corp

SLM

53.32

-0.34%

22.92B

15.81

Countrywide Financial Corp

CFC

36.05

+0.56%

20.92B

8.84

CIT Group Inc.

CIT

44.35

+0.00%

9.32B

13.53

AXP VS. INDUSTRY LEADERS

Statistic

Industry Leader

AXP

AXP Rank

Market Capitalization

AXP

70.18B

1 / 68

P/E Ratio (ttm)

JRJC

67.06

21.27

10 / 68

PEG Ratio (ttm, 5 yr expected)

MXT

8.40

1.58

8 / 68

Revenue Growth (Qtrly YoY)

TMFZ.OB

12.20%

31 / 68

EPS Growth (Qtrly YoY)

CT

15.99%

21 / 68

Long-Term Growth Rate (5 yr)

CKN

35.0%

13.0%

23 / 68

Return on Equity (ttm)

TMFZ.OB

85.87%

22.08%

19 / 68

Long-Term Debt/Equity (mrq)

EDLG

2.597

19 / 68

Dividend Yield (annual)

NEW

9.20%

0.86%

ii. If they were to increase share by 1%, by what percent would company sales increase or decrease for 2003? Show calculations

My Market (#)

Total Market (#) = My Market Share

Total Market (#) x My Market Share (%) = My Market (#)

iii. ROE and % change in sales

1. In Excel, plot the point-change in ROE (on the Y axis against the % change in sales on x axis, Use Excel function to find y intercept and slope of the trend line through the prior data, given y-value = intercept + slope * x-value, by how many percentage pints would ROE be expected to increase or decrease given 1% increase in firms market share.

Return on investment is calculated as the "return" (incremental gain/reduction in costs) from an action, divided by the cost of that action. That is "simple ROI." For example, the ROI for a new machine that is expected to cost $250,000 over the next twelve months and deliver $1,000,000 in cost reduction over the same time is:

[($1,000,000-$250,000)]/$250,000*100 = 300%

c. How and why has foreign competition affected the industry's

i. Market share of world sales -- 66%, industry leader

ii. Products - American Express Company is mainly in the business of providing travel-related services, financial advisory services and international banking services throughout the world.

iii. Profitability - "In 2003, we added 3.5 million new cards, bringing total worldwide cards-in-force to 60.5 million. We were among the top card issuers in both spending and lending balance growth, and had industry-leading credit quality. Worldwide billed business -- or spending on American Express cards -- rose 13%, with especially strong growth in consumer and small business spending, both in the United States and internationally." (American Express)

E. Valuation of the firm

a. Use equation on 176 for total required return, Using excel - The Capital Asset Pricing Model then allows an investor to compare these factors to a source like the overall stock market or an individual index within the stock market. Investors attempt to minimize risk so the Capital Asset Pricing Model is a tool to help avoid risk or if a certain risk factor is involved then investors feel they should be rewarded for taking additional risk.

Ks = Krf + B x (Km -- Krf) where

Ks = The Rate of Return

Krf = The Risk Free Rate

B = Beta

Km = The expected return on the overall stock market

For American Express Company we can assume a risk free rate of five percent and an overall stock market return of ten percent with a Beta of 1.141.

Ks = Krf + B x (Km -- Krf)

0.10705 or 10.71% = 5% + 1.141 x (10% - 5%)

The CAPM says that American Express Company's return on investment should be higher than 10.71%. And the range of growth last year was around 11.80% growth. Thus, an investment in the American Express Company of $1,000 over the course of the next three years would provide a rate of return of:

First Year Return = $1,000 x (0.118 + 1) = $1,118

Second Year Return = $1,118 x (0.118…