American Express Has Growth in the Cards

Warren Buffett is famous for saying, "Why jump over seven-foot hurdles when you can walk over one-footers?"

With the financial sector in distress, trying to accurately value the balance sheets of storied institutions such as Citigroup (C - commentary - Cramer's Take) and Merrill Lynch (MER - commentary - Cramer's Take) is like trying to clear a seven-foot hurdle -- it's impossible right now.

Why even bother when you can pick up juicy low-hanging fruit like American Express (AXP - commentary - Cramer's Take) at prices not seen for years? Over the next three to four years, Amex could change hands for double today's current stock price.

At $37 a share, Amex currently boasts a market cap of some $43 billion. With 2008 EPS expected to come in at $3.30, you are paying 12 times earnings for one of the most dominant franchises in business today. For the past 10 years, Amex has earned an average return on equity of over 25% and has returned more than 60% of capital to shareholders each year. These kinds of figures will, in all probability, command higher valuation multiples in the years ahead.

A Unique Global Franchise

Very few companies ever attain the type of dominance that American Express has. It operates in an industry with a couple of major players, with the threat of additional new competition virtually impossible. When is the last time you heard an entrepreneur plan to start a credit card business (or soft drink company for that matter)?

American Express currently has 88 million credit cards in force that generate well over $600 billion in spending from cardholders that are arguably best of breed in terms of credit quality. The average Amex cardholder boasts a FICO score above 720.

Unlike Visa (V - commentary - Cramer's Take) and MasterCard (MA - commentary - Cramer's Take), which are only card processors, American Express, like smaller rival Discover (DFS - commentary - Cramer's Take), is a true card lender. American Express' closed-loop payments network enables the company to control every part of the credit process. Ironically, the high valuations being afforded to Visa and MasterCard make Amex an even more compelling investment at the current price.

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At the time of publication, Gad had no positions in stocks mentioned, although positions may change at any time.

Sham Gad is the managing partner of the Gad Partners Fund, a value-centric investment partnership modeled after the original 1950s' Buffett Partnerships. Previously, Gad was a writer for The Motley Fool and a securities analyst for UAS Asset Management, a small, value-focused fund in New York City.

Gad also runs a value investing blog inspired by the teachings of Benjamin Graham and Warren Buffett. Gad is working on a value investing book (title forthcoming) to be published by John Wiley and Sons in the summer of 2009. Reach Gad at [e-mail].