AXP Applied Equity Valuation new version

Krause Fund Research
Fall 2014
Current Price: $90.13
Target Price: $101.37 – 103.41
American Express. (NYSE: AXP)
Important disclosures appear on the last page of this report.
Financial
Recommendation: HOLD
Analysts
Jiangliang Chen
Jianliang-chen@uiowa.edu
Qiao Huang
Qiao-huang@uiowa.edu
Tongxin Xian
Tongxin-xian@uiowa.edu
Qiaochu Geng
Qiaochu-geng@uiowa.edu
Stock Performance Highlights
52 week Range $78.41‐$96.24
Beta Value 1.176
Average Daily Volume (M) 4.228
Share Highlights
Market Capitalization (B) $93.83
Shares Outstanding (B) 1.04
Book Value per share $19.4
EPS (yr.) $5.38
P/E Ratio 16.73
Dividend Yield 1.1%
Dividend Payout Ratio 18%
Company Performance Highlights
Return On Assets 3.78%
Return On Equity 29.14%
Discount Revenue (B) $18.7
Interest Income (B) $7
Financial Ratios
Current Ratio 1.00
Debt to Equity 6.87
Earnings Estimates
Year 2012 2013 2014E 2015E 2016E
EPS 3.89 4.88 5.31 5.93 6.62
DIV 0.8 0.89 1.01 1.10 1.17
Sources: Yahoo! Finance i
November 18, 2014
Amex-World Top Card’s Issuer
 With the continuing improvement of
the economy, American Express had a progressive increase in
its net income in 2013. Its net income rose 19.5% to $5,359
million with a 27.92% return on equity. We believe its
management team will continue maintaining a high return on
equity at a 25.32% in continuing value year.
 The economy is recovering from the crisis and customers
have more resources to pay off their credits. The October
Consumer Confidence Survey result showed a new recovery
high at 94.5, which indicates better consumer perceptions of
employment, business condition and income, and also indicates
a stronger consumer spending. We are optimistic about
American Express’s future growth of billed business at 7%
after drove by the increasing consumer confidence level.
 Severe competition in the consumer finance industry forces
companies to look for opportunities outside U.S. American
Express proactively continues its global expansion through
international partnerships, which will help American Express
gain global consumers and build company name. Therefore, we
believe it will boost American Express’ billed business through
4% growth rate of cards-in-force.
One Year Return
Sources: Bloombergii
Company Overview
American Express Company (AXP) is a global services
company offering charge and credit payment card products and
travel-related services to consumers and businesses around the
world. The Company operates four segments: U.S. Card
Services (USCS), International Card Services (ICS), Global
Commercial Services (GCS) and Global Network and Merchant
Services (GNMS). As of year-end 2013, the Company is the
world’s largest card issuer by purchase volume, and recognized
as the most innovative company in industries. With $952.3
billion worldwide billed business, the Company operates the
world’s largest travel network serving consumers and business.

Executive Summary
We recommend to hold American Express Company at this
time based on our economic, industry, and company analysis.
We predict the GDP will continue to increase in 2015 as well as
the unemployment rate decrease. Based on our prediction and
analysis, these factors stimulate the consumer confidence level
to increase. With a consumer purchasing power increase,
people will borrow more credit in order to spend more. As the
world’s largest cards issuer and its continuous global
expansion, American Express will continue increasing its
revenue from billed business and maintaining a high total
payout ratio around 80%.
ECONOMIC OUTLOOK
GROSS DOMESTIC PRODUCT
GDP (Gross Domestic Product) is the monetary value of all the
finished goods and services produced within a country’s
borders during a specific time period. In the 3rd quarter of
2014, the real GDP, which is inflation adjusted, increased at
annual rate of 3.5%iii, which is an indicator of the economic
health of United States (U.S.). The following figure indicates
the annualized quarterly real GDP from 2007 to 2014. After the
2008 financial crisis, the U.S. economy has gradually recovered
since 2010 and experienced a stable and strong growth rate
indicated by the dotted red line.
U.S. Annualized Quarterly Real GDP (2007-2014)
Sources: bea.goviv
Following this trend, we anticipate that real GDP will
experience a growth rate around 3.0 percent over the next 6
months and 2.7 to 3.0 percent over the next 2 to 3 years.
Because the consumer finance industry is closely related to
consumer spending, and consumer spending is around 70% of
GDPv, we expect the consumer finance industry will benefit
from the positive U.S. GDP growth trend.
UNEMPLOYMENT RATE
The unemployment rate is the percentage rate of the total labor
force that is unemployed but actively seeking employment and
willing to work. The following graph from Bureau of Labor
Statistics clearly presents a declining unemployment rate from
2010. The latest released actual unemployment rate for October
2014 was 5.8 percent, which is a 0.1 percent decline compared
to the September 2014 actual unemployment rate.
Unemployment Rate (2004-2014)
Sources: Bureau of Labor Statisticsvi
Monthly Actual Unemployment Rate 2014vii
Apr. May. Jun. Jul. Aug. Sep. Oct.
6.3% 6.3% 6.1% 6.2% 6.1% 5.9% 5.8%
According to the above table, we predicted the unemployment
rate will be around 5.7 percent over the next 6 months and
around 6 percent over 2 to 3 years. The short-term
improvement of the unemployment rate will encourage
personal consumption. On the other hand, a stable and
reasonable unemployment rate further increases consumer
confidence. Therefore, we expect consumers will be more
confident and the consumer finance industry could generate
more billed business and card member loans as assets.
CONSUMER CONFIDENCE INDEX
The index is based on a random consumer confidence survey
provided by The Conference Board. The index that has base year
1985 equal to 100 point and measures U.S. consumers’ optimism
and sentiment. Consumer Confidence Index (CCI) increased
from last year’s range 58.43 to 82.13 to current year’s 78.3 to
94.48 after adjusting the seasonal effect, even reached the
highest point at October as 94.48 after economic crisis of
2008.viii Financial sector, the uptrend of CCI is benefiting the
financial sector, especially for the consumer finance industry.
U.S. Consumer Confidence Index (1985=100)
Sources: Factset dataix
Page 2

The table above shows the CCI data from 2007 to September,
2014. As higher consumption optimism which dramatically
increased from the depression, we expect that the consumer
confidence will continue being optimistic and reach 100 to 110
that is similar to the point before crisis. Also, the uphill data,
which means higher consumer expenditures, gives the
consumer finance industry a positive effect.
QUANTITATIVE EASING
As the market is in depression, U.S. Federal Reserve
announced that the central bank bought back governments
bonds from the market to liquidate the cash flow. This
quantitative easing strategy also lowers interest rates, which
increases the financial services’ lending. When bank lending is
more lenient by the lower overnight federal fund’s rate, the
increase in commercial and consumer lending stimulates the
market.x As interest rates almost reach zero and the economy is
outperforming, FOMC announced the end of QE3. However,
the bonds buying program of QE3 2014 may not be the end of
the story, and we are still looking forward to the market’s
reaction. As our perspective, interest rates will not sharply turn
upward, and may stay at almost zero for at least three quarters.
Financial industry will still have a positive effect from this
lower overnight rate. But after that, the short term borrowing
rate will increase to 2 percent in early 2016.
U.S.Effective Federal Funds Rate
Sources: FREDxi
INDUSTRY ANALYSIS
INDUSTRY DESCRIPTION
The financial sector is comprised of four industry groups:
banks, diversified financials, insurance, and real estate. The
2008 financial crisis brought about strict credit quality
regulations from the Federal Reserve. Therefore, heavy
interest-bearing products and business segments, such as
mortgage loans and automobile loans, declined since 2008.
While banks experienced a hard time since 2008, credit card
companies in the consumer finance industry will embrace its
growth as consumers have lower debt services and higher
savings.
The consumer finance industry mainly lends credit to
individual consumers. Companies’ major revenue sources are
billed business, card member account receivables, and card
member loans, which generate discount revenue and net interest
income, respectively.
INDUSTRY DEVELOPMENTS AND TRENDS
In the past few years, companies in the consumer finance
industry invested significantly in social media marketing to
attract new customers, build a company name, and expand
market share. As the U.S. consumer finance industry has
entered a mature stage, major companies strive to balance its
account growth, margins, and expenses with strategic growth
initiativesxii. Within traditional products and services, the major
competitors in this industry are highly competitive, therefore
they encounter a relative low threat of new entrants. However,
as the consumer finance industry continues to develop
competitive new technologies, invest heavily in social media,
and create mobile payment platformsxiii, it brings new industry
competitors from developing companies in the mobile payment
space.
Severe competition led credit card companies to seek and
develop potential partnership opportunities globally. In August
2012, Discover agreed to help PayPal expand its merchant
locations across Discover’s U.S. existing relationship. In return,
this partnership added value to Discover’s international
businessxiv. Similarly, in April 2014, American Express
partnered with China Minsheng Banking Corporation to launch
‘CMBC American Express Multi Currency Platinum Credit
Card’xv, which might help American Express build its company
name and gain potential high end consumers. We believe this
industry trend strongly validates our positive anticipation that
consumer finance industry would outperform other financial
industries.
STRESS TEST
Tier 1 Common Ratio Results of the Dodd-Frank Act Stress
Test
Sources: Forbesxvi
Page 3

Dodd-Frank Act Stress Test is one important scenario check
about whether the financial industrial can survive under the
worst economic scenario. As the figure shown above, the
average tier 1 ratio is 8.2 percent and under 5 percent is failure
in this test. The results showed American Express outperform
in financial industry under the hypothetical scenario in tier 1
common ratio. The company will have sufficient weighted risk
capital to face the deep economic downturn. Comparing to
another consumer finance company, Capital one, American
Express and Discover have capability to hold the adverse
scenario.
Under the Dodd-Frank Act Stress Test, there is one specific test
about credit card losses under the depression scenario. As the
figure shown below, American Express would have lower loss
under credit card in the worse scenario. Base on the structures,
Capital One and Discover, which highly rely on the interest
income, could not have good performance under depression.
Credit Card Loss Rate test in Stress Test
Sources: federalreserve.govxvii
MARKET AND COMPETITION
Consumer finance industry set its emphasis on credit card loans
and consumer loans. These loans generally are higher margin
but higher risk compared to other sub industries inside the
financial sector. Competition is relatively more intensive than
in regular financial services companies which generate capital
by their sizes. The major players under this sub-industry are
American Express (AXP), Capital One Financial Corporation
(COF) and Discover Financial Service Inc. (DFS). However,
revenue from this sub sector mainly relies on their credit card
loan, so we also count two card processing companies, Visa (V)
and MasterCard (MA), as main competitors.
Leading Company Comparison Table
Ticket Cap. P/E ROE EPS P/B
AXP 94.39B 16.86 29.14% 5.38 4.69
COF 45.78B 11.14 10.18% 7.34 1.04
DFS 29.47B 12.36 23.02% 5.26 2.77
V 156.34B 28.87 20.04% 8.62 5.68
MA 96.90B 28.95 48.38% 2.90 14.95
Sources: Yahoo.Financexviii
According to the comparison within these five leading
companies, Visa and MasterCard will be leading companies
by higher P/E ratio and higher ROE. But if we isolate these
two companies for they are card-processing companies
instead of financial companies that make card loan, AXP
will be the leading company within consumer finance. ROE
ratio is widely used in the financial industry to measure the
financial performances, and American Express is not only
has higher return on equity, but also has the higher expected
return from its highest P/B ratio.
Market Comparison
Sources: Yahoo! Finance xix
NET CHARGE OFF RATE
Net charge off rate, which is one important economic indicator,
measures the proportion of never collectable balance from
consumerxx. The higher the ratio is, the worse credit quality is
over the economy. Also, if net charge off ratio goes upward, the
financial industry has increasing uncollectable balances, which
shrinks the account receivable.
U.S. Net Charge off Rate for Credit Card
Sources: Bloombergxxi
The graph shown above is the net charge off rate for credit card
services. The subprime crisis of 2008 lifted the ratio up, and it
decreased year by year after that. The net charge off rate,
released from 2014 Q2 for credit cards is only 3%. We have
confidence that the credit quality will maintain in high level
Page 4

and the ratio will constantly vary at lower range about 2%-3%,
and in this range, consumer finance companies have lower risk
to expand their business.
COMPANY ANALYSIS
COMPANY BUSINESS DESCRIPTION
American Express Company is a global payment, services and
travel company, which was founded in 1850 and incorporated
in 1965 in New York. American Express provides services,
including charge and credit payment card products and travel-related
services to both individual customers and institutional
business around the world. American Express Company has
four reportable segments: U.S. Card Services, International
Card Services, Global Commercial Services and Global
Network & Merchant Services.xxii 52% of American Express’
revenue comes from U.S. Card Services segment.
Revenue component by Segments of American Express
Sources: FactSetxxiii
American Express Company has nine subsidiaries, including
American Express Ltd, Accertify, Inc., American Express
Canada, American Express Financial Corp., Revolution Money,
Inc., Harbor Payment Holdings, Inc., American Express Travel
Related Services Co., Inc., American Express Centurion Bank,
and Rockford Industries, Inc.xxiv People seldom know that
American Express has nine subsidiaries because the most well-known
product and services American Express provides is its
card-issuing business.
CORPORATE STRATEGY
According to American Express Company’s annual report, its
core corporate strategy is “broadening the card member and
merchant base for our network worldwide.xxv American
Express’s Global Merchant Services business is one of the core
focuses to achieve its corporate strategy. In order to broaden its
merchant base, American Express carefully select qualified
third-party banks and financial institutions and sign partnership
contract with them. American Express also spends large
amounts of time and effort to acquire and retain high-spending
and creditworthy card members through providing different
rewards or loyalty programs, high-quality customer services
and a safe security system.
MARKET STRATEGY
American Express is unlike other card processers, such as Visa
or MasterCard, uses Closed Loop Network strategy, which can
place American express’s position in card issuer, network,
processor and merchant acquire. The model they used gives
them ability to see both sides of the transaction and makes it
easier for them to provide perspectives to merchants.
Closed Loop Network Model
Sources: American Expressxxvi
Not only can they gain on both side’s information, the company
also applies a spend-centric model that target customers who
are more likely to spendxxvii. Under these two models, its billed
business increased 7 percent last fiscal year, and spending per
card member is generally higher than competitors in
industryxxviii.
In our view, the billed business under its advantages of models
will constantly growth at 7 percent after, but in this intensive
competitive credit card market, the average discount rate bill to
each business will decrease due to attracting more businesses
join.
FINANCIAL SUMMARY
American Express Company is classified as Consumer Finance
industry under Financial Sector based on Global Industry
Classification Standard.xxix According to the Nilson Report
published in February 2014, American Express accounted for
12.1 percent of general-purpose credit card outstanding
balance.xxxAmerican Express Company has 5.70 percent
quarterly revenue growth rate from Q1 to Q2 2014 main
resulting from the increase in discount revenue and net card
fees.xxxi The increase in new card members and current card
members’ spending drive the increase in discount revenue and
net card fees, which then increased the total revenue. The
company seeks to have an at least 8 percent growth rate on its
revenue net of interest expense. However, it only has 3.1%
growth in revenue net of interest expense in Q3. The earning
per share increased from $3.69 to $4.19. We believe that
American Express will have a revenue growth rate close to 3.3
to 3.5 percent for its fiscal year 2014 based on the fact that the
growth in consumer confidence in the next 3 to 6 month will
drive the consumer credit card spending.
Page 5

PRODUCTS AND SERVICES
American Express’s range of products and services mainly
includes: Charge from credit card product, travel services and
loan interest incomexxxii.
Revenues Components of American Express
Sources: Company 2013 Annual Report to Shareholdersxxxiii
 Charge and credit card products
 Discount revenue, which is one the main revenue
sources, is generated by American Express charging
merchandise a certain fee from every time customers
swipe their American express credit cards.
 Annual membership services fee, which varies from
different types of credit cards and programs that
customers have.
American Express Cards In Force and Average Spending
Sources: Bidnessetcxxxiv
Discount fee that is charge to every merchandise when
customers swipe their credit cards, is a main sources of their
revenue. Their billed business from U.S. is generally more than
sixty percent of its total billed business. The international billed
business increase 6 percent in 2013, which is slightly lower
than the 8 percent increase in U.S. billed business. Also the net
card fees increase 125 million in 2013, which have both higher
cards in force and fee per cards.xxxv In our perspective,
American Express have new strategy to connect the small
business services which will steady its 7 percent increase in
billed business worldwide per year. Cards in force will increase
4 percent conservatively each year while it is limited by the
spend-centric model and it is hard to have a more widely target.
 Consumer and business travel services;
Stored value/prepaid products such as American Express
Serve, Bluebird and Travelers Cheques
 Transaction fee for supplier and customers (such as
booking air tickets)
According to year by year data, revenue from travel
commissions and travel services is relatively flat almost all the
time. U.S. consumer travel sales decreased 2 percent in 2013
and business sales were relatively flat. In our concern, travel
commission is a stable product in the company, but it also
reflects certain risks that it cannot be expanded like other
services.xxxvi
 Loan interest income- interest income earned from loan
balancexxxvii.
Incensement of card member’s spending drives the higher
outstanding balance of the loan, which can have higher interest
income. We believe that the uptrend movement of billed
business and average card spending year by year can lift the
interest income simultaneously; however we also believe lower
demand in the future will lower the effective interest rate of
loans, and it leads to a relatively slower increase in interest
income.
COMPETITION
After American Express transferred from a credit card company
to a commercial bankxxxviii and gained more access to financial
products, comparison within consumer finance and banks more
frequent. However, American Express did not change its
services structure dramatically several decades ago, and the
company still focus on its card services by using a closed loop
model to earn discount revenue.
Models advantage
Sources: Cmax.americanexpressxxxix
Unlike Visa and MasterCard, which act like a technology
company to build successful networks for banks to issue the
branded credit card, American Express issues its own card and
builds its own networks. In this model, it can access all
transaction data inside the close loop networks, providing more
accurate strategies by using unbridged data. Also certain frauds
can be reduced and foreign transactions can be protectedxl. We
believe this strategy assists American Express easier to analyze
and target new business.
Page 6

SPEND-CENTRIC MODEL
It is clear that Visa and MasterCard play important roles in the
cards market. If we compare credit card purchase volume by
independent network type, Visa is steady in almost 45 percent
of the market. During recent years, American Express’s credit
card purchase volume has higher share in the market and
exceeds MasterCard’s. This result is not only based on the
increased billed business, but also the higher spending for each
American Express card member.
Credit Card Market Share by Purchase Volume
Sources: Cardhubxli
It is clearer explained at the graph below. If we compare the
credit card market by independent issuers, American Express
has dramatic outperform in the U.S. market. Base on its spend-centric
strategy, which means that the company targets higher
spending card members, average cardmember spend per
account is remarkably higher than other issuer.
Average Cardmember Spending Comparison
Sources: Punchcardblog.wordpressxlii
We have confidence that the spend-centric model will provide
better spending figures per card base on the economic recovery
and the uptrend consumer confidence index.
LOYALTY
Compare to other credit card issuers or consumer finance
companies, like capital one and discover, American express has
higher brand reputation. According to the survey shown below,
American Express is more reliable and has higher quality
compare to other issuerxliii. We define this reputation caused by
that the targeted business and partnerships with American
Express are always middle to large size business, and it gives
card user’s distinctive experience by using their cards. We have
faith in that the brand will still have highest reputation inside
the consumer finance industry as credit card issuer; however,
that standing at the industry average innovation and creativity
level is not a good signal for a traditional credit card company
in this E-commerce century.
Brand Reputation Comparison
Sources: Punchcardblog.wordpressxliv
Other strengths
Regulation
As a bank holding company, American Express’s capital
actions are regulated under the New Capital Rule forced by
Federal Reserve. Dodd-Frank Act enforces straightforward
capital ratios that must be achieved by all bank holding
companies, including American Express. On March 2014, the
released Federal Reserve report of “Supervisory Stress Test
Methodology and Results” projected minimum Tier 1 common
ratio for all bank holding companies from Q4 2014 to Q4 2015.
Among 30 participants, American Express has a 12.1%
projected Tier 1 common ratio compared to 8.2% median ratio.
This result indicates American Express has strong resistance
against adverse economic conditions.
Dividend Pay Out Plan:
American Express aims to return approximate 50 percent of the
returned capital to shareholders through dividends and share
buybacks. On March 26, Federal Reserve approved American
Express’s capital plan. This capital plan includes 26 cents per
share quarterly dividend and 4.4 billion common share
buybacks during 2014 with an additional 1 billion in the first
quarter of 2015.xlv Strong payout program indicates American
Express’s confidence and robust business performances.
American Express Dividend Payout Ratio
Sources: bidnessetcxlvi
Page 7

 We expect that American express will still keep around about
20 percent payout ratio at 2014, and have projected dividend
1.01 at 2014 and 1.10 at 2015.
CATALYSTS FOR GROWTH/CHANGE
 Apple pay just announced by technology company Apple,
which will accelerate the NFC payment markets. As one of
partnerships, American Express’s credit card has already
supported the apply pay system. However, according to the
report, there are 97.6 percent business in U.S. cannot
support NFC P.O.S systemxlvii, which will be chances for
Amex to reach more customers for some merchants that
are not supporting Amex’s cards , but it still be challenge
for NFC to be everywhere.
 Base on the Chinese card users’ huge increased, UnionPay
jumps to the top card issuer and play an important role in
card’s market. In recent, government in China expected to
open the card clearing to foreign form, which will be one
chance for all foreign card issuers like Amex, to get the
opportunity expanding their worldwide market shares.
 Domestic regulations might not be a threat for American
Express since it can respond quickly to subsequent changes
of any regulatory policies and requirements. However, the
regulations from foreign countries are certain threats of
company due to its global network services. Partnered
foreign banks, institutions, and merchants might indirectly
pass the adverse influences of local governance to
American Express because of the volatile uncertainty.
S.W.O.T. ANALYSIS
Strengths
 Trustworthy brand name
 Leader company in the industry
 Highly recognized in the international level and
provide unique GNS business
 Specialized in credit card, international travel
card/cheque services
 Have large capital to support 62800 employees and
company daily operationxlviii
 Reward program for customers
 Have operate offices all over the world
 Rank as customers most satisfied credit card company
since 2007 by J.D. Power and Associatesxlix
Weakness
 Immature debt card services at the point-of-sale
 Traveler cheque Services decline
 Increasing risky portfolio
 Lower innovation in E-commerce
 Slow expansion in global market
Opportunity
 Enhance customers digital experience and develop
platforms for online and mobile service in digital
marketplace
 Developing international business
 Great financial leverage
 Good acquisition strategy, e.g. GBT program
 Innovation in different area to provide easier and more
convenient customer services
 Diversify customer services and portfolio management
 Worldwide acceptance
Threats
 Intense competition within in the financial industry
 Uncertainty and volatility economy environment
 Changing government regulation would restrict certain
transaction or services.
 Low customer confidence rate
 Politic risk
Main factors that drive the industry going forward
Factor 1: Technology
 Consumption increase for more comfortable E-commerce
environment
 NFC tech for app payment
Factor 2: Consumer Confidence Level
 Increasing consumer confidence level will increase
personal consumption expenditure, which will boost
GDP, and then have positive influence on financial
industry.
Factor 3: Interest rate
 GDP may be lifted by investment required when
economic back on track, and interest rate, which is big
component of profit of banks, will increase by higher
demand.
Factor 4: Global view
 For credit card services: developing country will be
emerging markets for credit card.
 For diversified services: investment increase when
economic going well
Key investment Positives and Negatives
Positive:
 E-commerce, mobile payments: As real-time mobile
payments heated up, credit card companies could
benefits from this new initiative if they successfully
catch the chance and develop advanced mobile
services. It will help companies reduce human
resources costs, stimulate more credit purchases, and
retain loyal customers by providing superior
immediate services.
 The recovering economy: Decreasing delinquency
rates and unemployment rates, increasing GDP, and
higher CCI, will give chance to credit card companies
a boom.
 Amex also have new strategy and cooperate with new
mobile pay technology for targets more business.
Negative:
Page 8

 Government regulation and capital requirement: Since
2008 credit crisis, governmental regulations on
financial institutions are strict. If banks are too
optimistic about credit quality and overly loose the
loan standards, it could trigger regulators’ alerts,
which constrains the earnings growth of banks.
 Foreign currency exchange rate: The fluctuate
currency exchange rate may be a negative factor for
international financial companies because it will cause
companies reconsider their business structure overseas
and may lose some good investment opportunities.
 Intense competition within the industry: According to
the previous Porter’s 5 forces analysis, we found
customers tend to choose financial companies that
have long history, trustworthy name and can provide
wide range services. Most leading companies in the
industry fit these criteria so they will introduce
beneficial policy for example provide lower interest
rate to customers to stand out in the competition.
These kind of policies may lead to malpractice
competition that will harm the whole industry,
VALUATION MODEL
STOCK PRICE ESTIMATES
Through different valuation models, we generated various
estimated stock prices of American Express (partial year
adjusted):
DCF& EP: $ 101.37
DDM: $ 103.41
Avg. Relative P/E: $ 85.79
Avg. PEG Ratio: $ 75.32
P/B Multiple 2014: $ 76.63
Even though we projected different stock prices from various
valuation models, we have more confidence in the stock prices
derived from discounted cash flow (DCF) and dividend
discount model (DDM). Although the relative valuation models
provide a useful industrial outlook for us as we use the average
major competitors’ multiplier, we do not value the quality of
the output from these models. Because American Express itself
stands as an outliner among its major competitors’ multiples,
we think relative valuation models are unreliable. In contrary,
the DCF valuation model includes several company specific
key assumptions, while the DDM valuation model relies on the
company’s stable dividend payout ratio. Thus, we are confident
about the price projections of $101.37 and $103.41 generated
from the DCF and DDM valuation models.
KEY ASSUMPTIONS
Revenue Decomposition
American Express’ revenue is comprised of discount revenue
and interest income. In historical average, discount revenue
counts 55% of total revenue, while interest income counts 19%
of total revenue. While discount revenue is the main driver of
revenue from billed business, interest income is generated from
card member loans. We further decomposed interest income
into four business segments: U.S. card services, international
card services, global network and merchant services, and
corporate services. Our assumptions were mainly derived from
American Express’ historical performance and adjusted to the
current economy and industry trends.
Billed Business
Discount revenue is composed of fees charged to merchants as
consumers use American Express cards at their stores, billed
business plays a key role in generating revenue. Billed business
is also the original source of interest income on loans.
American Express defines card member loans as revolving
amounts due on lending card products that are recorded with a
merchantl.
Since billed business equals cards in force times revenue per
card, the number of cards that are issued and outstanding is
essential in generating revenue. Based on the historical average
growth rate of 5%, we believe cards-in-force will grow at
4%over the next 3 years and 3% over the next 4 years till the
continuing value year. This growth rate slowdown indicates
that American Express is shifting its strategy from attracting
consumers to gaining market share to build more partnerships
in the mobile payment revolution. For revenue per card, we
anticipated a 1.5% growth rate since consumer confidence level
has been enhanced. Thus, we projected a 4.5% growth rate of
billed business.
Discount Revenue
Based on the projected billed business, we believe a 1.7% CV
percentage fees charged on billed business from merchants will
generate American Express’ discount revenue. This rate is
slightly lower than 2013 effective 1.96%, since we believe it is
necessary for American Express to lower its rate to build more
business agreements with merchants.
Cost of Equity
In the financial sector, liability management is a core business
and not just a source of financing. Therefore, the cost of equity
is a more practical and valuable measure than the weighted
average cost of capital. Cost of equity accounts for the value
from both asset allocation, investment portfolio returns, and
liability management. To generate the cost of equity, we
adopted CAPM model which requires risk-free rate, the firm’s
beta, and the market risk premium. We used 1.176 as American
Express’s beta from Bloomberg as of 10/29/2014. For risk-free
rate, we believed the 30-year U.S. Treasury bond rate of 3.05%
would best guarantee a risk-free investment. To get a more
reliable market risk premium, we used the geometric average of
historical market risk premiums from 1928-2013, which is 4.64
percent. Consequently, we generate an 8.51% cost of equity.
Discounted Cash Flow/Economic Profit Model
We believe that the discounted cash flow model and economic
profit model projected the best intrinsic value for American
Express. As DCF model considers CV year net income, free
cash flow to equity, CV growth, CV ROE, and cost of equity, it
projected stock price of $97.07 as of 12/31/2013. After partial
Page 9

year adjustment, we predict American Express stock price will
reach $103.41 as of 11/17/2014.
Dividend Discount Model
Since American Express anticipates stable dividend payout
ratio, we believe DDM provides a reliable valuation.
Historically, American Express distributed 18.2 percent of net
income to its shareholders. Following this ratio, we predicted
$97.07 stock price as of 12/31/2013. The partial year adjusted
stock price is $103.41 as of 11/17/2014.
SENSITIVITY ANALYSIS
Overview
The forecasts in our valuation models can be volatile if key
assumptions are different from actual values. We tested diverse
scenarios and analyzed their impacts on projected stock price,
produced several sensitivity tables.
ROE/CV Growth
First, we tested the combined impact of return on equity and
continuing value growth rate. Since return on equity and CV
growth are key assumptions in DCF, EP, and DD models, slight
upward/downward change will affect current projected stock
price. American Express historically had a ROE between 20-
29%, so we include a range between 23.5% and 27.5%. CV
growth is closely related to the GDP growth rate, therefore we
anticipate a CV growth range between 2.75% and 4.25%,
which fluctuate around current real GDP. According to the
table, we observed that stock price is more sensitive to CV
growth. With 0.25% drop in CV growth rate, projected stock
price will decrease to $98.44; in contrary, projected stock price
will increase to $104.61. Thus, any changes in factors that
related to GDP should take into further considerations.
Cost of Equity/CV Growth
We also tested the stock price change from fluctuations of cost
of equity and CV growth. In calculating the cost of equity, we
used the CAPM approach by combining effects of the risk-free
rate, company’s beta, and the market risk premium. As Federal
Reserve decided to quit QE strategy, we believe Treasury bond
yields will rise and affect the risk-free rate, as Treasury bond
yield is a proxy of risk-free rate. The following table indicates
that a small change in cost of equity has a dramatic impact in
projected stock price. When cost of equity increases to 8.75%,
stock price will drop to $96.62, which reflects a $5.05 decrease.
Therefore, we expect price adjustments as Federal Reserve
announces any changes.
MRP/Beta
Another two assumptions in CAPM approach are the market
risk premium and company specific beta. We are very
confident about our 4.64% assumption of MRP in a long-term
outlook because it covers a large number of years’ statistics.
However, in a short-term, the actual MRP will reflect the
change of the risk-free rate. As Fed quits the QE strategy, we
expect MRP will decrease as the risk-free rate increases. Thus,
stock price will move left toward current projection. Beta
measures the systematic risk of AXP in comparison to the
whole market. We believe AXP will gradually have a higher
beta because it faces more global factors as it continues to
expand its global markets. Combining these two possible
changes, AXP’s stock price will fall in the left bottom range.
Percentage Fees Charged to Merchants/Billed Business
Growth Rate
Discount revenue is the major revenue source of American
Express that generated from fees charged to merchants on
billed business. Historically, American Express had 1.95% to
2.26% fees charged to merchants. We anticipated a 1.7% in CV
year because company needs to lower the charged fees in order
to survive as the credit card market becomes saturated and
competition goes severely. However, because American
Express has a diversified products and services relating to its
cards, this rate might be higher than our projection as it has
more cross selling. Meanwhile, as American Express’ global
expansion and partnership strategy achieved superior success
compared to industrial competitors, CV billed business would
be higher than 4.5%. Therefore, the further price adjustment
will fall in the right bottom range.
Page 10

CV Effective Interest Rate on Card Member Loan/CV Card
Member Loan Growth Rate
Interest income is the second largest source of AXP’s revenue.
Although severe competition will force American Express
lowers its interest rate as we forecasted 8.72%, credit quality
concern might stimulate American Express to increase its
interest rate. Similarly, card member loans growth rate might be
affected downward as a higher interest rate forces consumers
and merchants pay in a timely base. Thus, the projected stock
price might fall in left upper range.
IMPORTANT DISCLAIMER
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report
was originally created to offer an internal investment
recommendation for the University of Iowa Krause Fund and
its advisory board. The report also provides potential employers
and other interested parties an example of the students’ skills,
knowledge and abilities. Members of the Krause Fund are not
registered investment advisors, brokers or officially licensed
financial professionals. The investment advice contained in this
report does not represent an offer or solicitation to buy or sell
any of the securities mentioned. Unless otherwise noted, facts
and figures included in this report are from publicly available
sources. This report is not a complete compilation of data, and
its accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Krause
Fund may hold a financial interest in the companies mentioned
in this report.
Page 11

References
i American Express Company (AXP). (n.d.). Retrieved
November 18, 2014, from
<http://finance.yahoo.com/q/co?s=AXP+Competitors>
ii AXP Equity. (n.d.). Retrieved November 18, 2014, from
<Bloomberg terminal>
iii Mataloni, L., & Aversa, J. (Eds.). (2014,
October 30). News Release: Gross Domestic
Product. Retrieved November 18, 2014, from
<http://www.bea.gov/newsreleases/national/g
p/gdpnewsrelease.htm>
iv National Economic Accounts. (n.d.). Retrieved November 18,
2014, from <http://www.bea.gov/national/Index.htm>
v Graph: Personal Consumption Expenditures/Gross Domestic
Product. (n.d.). Retrieved November 18, 2014, from
<http://research.stlouisfed.org/fred2/graph/?g=hh3>
vi Databases, Tables & Calculators by Subject. (2014, November
8). Retrieved November 18, 2014, from
<http://data.bls.gov/timeseries/LNS14000000>
vii Economic Calendar. (n.d.). Retrieved November 18, 2014,
from <http://www.bloomberg.com/markets/economic-calendar/
>
viii Bloomberg L.P. (2014) CONCCONF from 01/01/13 to
11/1/14. Retrieved November 18, 2014, from Bloomberg
database.
ix FactSet Research Systems. (n.d.). American Express.
Retrieved November 18, 2014, from FactSet database.
x Prime rate, federal funds rate, COFI. (n.d.). Retrieved
<http://www.bankrate.com/rates/interest-rates/prime-rate.aspx>
xi Graph: Effective Federal Fund Rates. (n. d.). Retrieved
November 18, 2014, from <http://research.stlouisfed.org/fred2/>
xii Industry Surveys Financial Services: Diversified. (July 2014).
p. 5-6 S&P Capital IQ. McGraw Hill Financial.
xiii Industry Surveys Financial Services: Diversified. (July 2014).
p. 1 S&P Capital IQ. McGraw Hill Financial.
xiv Industry Surveys Financial Services: Diversified. (July 2014).
p. 3 S&P Capital IQ. McGraw Hill Financial.
xv (n. d.). American Express Company, 15. World Market
Intelligence.
xvi Stress Test Results: Big Banks Look Healthier As 29 of
20 Pass, Zions Fails. (2014, March 20). Retrieved
<http://www.forbes.com/sites/halahtouryalai/2014/03/20/str
ess-test-results-big-banks-look-healthier-as-29-of-30-pass-zion-
fails/>
xvii (2014, March). Dodd-Frank Act Stress Test 2014:
Supervisory Stress Test Methodology and Results. Board of
Governors of The Federal Reserve System. Retrieved from
<http://www.federalreserve.gov/newsevents/press/bcreg/bcreg2
0140320a1.pdf>
xviii American Express Company (AXP). (n.d.). Retrieved
xix American Express Company (AXP). (n.d.). Retrieved
xx Net Charge-Off Rate Definition | Investopedia. (n.d.).
Retrieved November 18, 2014, from
http://www.investopedia.com/terms/n/net-charge-off-rate.asp
xxi Bloomberg terminal
xxii FactSet Research Systems. (n.d.). American Express:
Business Description. Retrieved November 18, 2014, from
FactSet database.
xxiii FactSet Research Systems. (n.d.). American Express:
Company Analysis. Retrieved November 18, 2014, from FactSet
database.
xxiv FactSet Research Systems. (n.d.). American Express: Entity
Structure. Retrieved November 18, 2014,from FactSet database.
xxv American Express Company. (2014). Annual report 2013.
Retrieved from
<http://www.sec.gov/Archives/edgar/data/4962/0001193125140
66777/d656045d10k.htm#tx656045_29>
xxvi Closed Loop. (n.d.). Retrieved November 18, 2014, from
<https://secure.cmax.americanexpress.com/Internet/Internationa
l/japa/AU_en/Merchant/Prospect/Why American
Express/Insights and Trends/Files/Closed-Loop-Network.pdf>
xxvii How American Express Gains A Competitive Advantage
From Its Closed-Loop Network. (2014, March 31). Retrieved
<http://www.forbes.com/sites/greatspeculations/2014/03/13/how
-american-express-gains-a-competitive-advantage-from-its-closed-
loop-network/>
xxviii Is Interactive Sidoti Research right for you. (n.d.). Retrieved
<http://www.trefis.com/stock/axp/model/trefis>
xxix Erik Oja, Industry Survey Financial Services: Diversified.
Page1. July 2014. Retrieved November 18, 2014
xxx Charts & Graphs Archive. (n.d.). Retrieved November 18,
2014, from
Page 12

<http://www.nilsonreport.com/publication_chart_and_graphs_ar
chive.php#>
xxxi American Express Company (AXP). (n.d.). Retrieved
<http://finance.yahoo.com/q/ks?s=AXP Key Statistics>
xxxii American Express Co. (2014). Form 10-K 2013. Retrieved
from SEC EDGAR website <http://www.sec.gov/edgar.shtml>
xxxiii American Express Company. (2014). Annual report 2013.
Retrieved from
66777/d656045d10k.htm#tx656045_29>
xxxiv American Express Stock Price Drivers. (2014, March 15).
Retrieved November 18, 2014, from
<http://www.bidnessetc.com/business/american-express/stock-price-
drivers/>
xxxv American Express Company. (2014). Annual report 2013.
Retrieved from
66777/d656045d10k.htm#tx656045_29>
xxxvi American Express Company. (2014). Annual report 2013.
Page 20. Retrieved from
66777/d656045d10k.htm#tx656045_29>
xxxvii American Express Company. (2014). Annual report
2013. Page 16. Retrieved from
66777/d656045d10k.htm#tx656045_29>
xxxviii Caggeso, M. (2008, November 11). American Express
Now a Commercial Bank. Retrieved November 18, 2014, from
<http://moneymorning.com/2008/11/11/american-express/>
xxxix Closed Loop. (n.d.). Retrieved November 18, 2014, from
xl Closed Loop. (n.d.). Retrieved November 18, 2014, from
xli Papadimitriou, O. (n.d.). Market Share by Credit Card
Network. Retrieved November 18, 2014, from
<http://www.cardhub.com/edu/market-share-by-credit-card-network/>
xlii Do Financial Services Companies Have Moats? Part II,
American Express. (2014, January 2). Retrieved November 18,
2014, from
<http://punchcardblog.wordpress.com/2014/01/02/do-financial-services-
companies-have-moats-part-ii-american-express/>
xliii Do Financial Services Companies Have Moats? Part II,
2014, from
xliv Do Financial Services Companies Have Moats? Part II,
2014, from
xlv AmEx (AXP) to Increase Dividend by 13%; Plans Buyback
Up to $4.4B. (2014, March 26). Retrieved November 18, 2014,
from <http://www.streetinsider.com/Corporate News/AmEx
(AXP) to Increase Dividend by 13%; Plans Buyback Up to
$4.4B/9319947.html>
xlvi American Express Dividends. (2014, March 15). Retrieved
<http://www.bidnessetc.com/business/american-express/
dividends/>
xlvii Spots, K. (2014, September 10). Why Apple Pay Could Be a
Game-Changer for Small Business. Retrieved November 18,
2014, from https://www.americanexpress.com/us/small-business/
openforum/articles/why-apple-pay-could-be-a-game-changer-
for-small-business/
xlviii American Express Co. (2014). Form 10-K 2013. Retrieved
from SEC EDGAR website <http://www.sec.gov/edgar.shtml>
xlix Home. (n.d.). Retrieved November 18, 2014, from
<http://www.jdpower.com/>
l American Express Company. (2014). Annual report 2013.
Page 72. Retrieved from
66777/d656045d10k.htm#tx656045_29>
Page 13

AMERICAN EXPRESS COMPANY
Revenue Decomposition
Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020 CV
Non-interest income
Discount revenue 16,734 17,739 18,695 19660 20709 21720 22915 23037 23405 23759
Cards-in-force 97 102 107 111 116 121 124 128 132 136
Discount revenue per card (in dollars) 172 173 174 176 179 180 184 180 178 175
Net card fees 2,183 2,506 2,631 2644 2749 2867 2940 3039 3156 3240
Fee per card (in dollars) 22.41 24.47 24.54 23.71 23.71 23.77 23.67 23.76 23.95 23.87
Travel commissions & fees 1,971 1,940 1,913 1901 1873 1853 1890 1906 1896 1890
Other commissions & fees 2,269 2,317 2,414 2547 2681 2796 2901 3008 3076 3214
Other non-interest revenues 2,164 2,452 2,274 2,177 2,177 2,180 2,193 2,231 2,240 2,210
Total non-interest income 25,321 26,954 27,927 28928 30189 31416 32839 33220 33773 34314
Interest Income
Interest income on loans 6,537 6,511 6,718 6966 7125 7150 6878 7279 7705 8156
Interest income and dividends on investment securities 327 246 201 186 167 162 158 153 149 147
Interest income on deposits with banks and other 97 97 86 105 106 124 141 157 177 271
Total interest income 6,961 6,854 7,005 7257 7398 7436 7177 7589 8031 8574
Total revenue 32,282 33,808 34,932 36185 37587 38851 40016 40810 41804 42888
Interest Expense
Interest expense from deposits 528 480 442 459 482 506 532 558 586 616
Interest expense from short-term borrowings 11 - - - - - - - - -
Interest expense from long-term debt & other 1,781 1,746 1,516 1643 1789 1878 1968 2062 2162 2269
Total interest expense 2,320 2,226 1,958 2103 2272 2385 2500 2621 2748 2885
Net interest income 4,641 4,628 5,047 5155 5126 5051 4677 4969 5283 5689
U.S. Card Services
Non-interest income 10,648 11,469 12,123 12526 12981 13352 13792 13786 13847 13897
42.05% 42.55% 43.41% 43.3% 43.0% 42.5% 42.0% 41.5% 41.0% 40.5%
Interest Income 5,230 5,342 5,565 5 ,806 5 ,992 6 ,023 5 ,814 6 ,223 6 ,585 7 ,030
75.13% 77.94% 79.44% 80% 81% 81% 81% 82% 82% 82%
Interest Expense 807 765 693 744 804 835 875 917 962 1010
34.78% 34.37% 35.39% 35.40% 35.40% 35.00% 35.00% 35.00% 35.00% 35.00%
USCS Net Interest Income 4,423 4,577 4,872 5,061 5,188 5,188 4,939 5,306 5,623 6,021
Total Revenue USCS 15,878 16,811 17,688 18,331 18,974 19,375 19,606 20,010 20,432 20,928
International Card Services
Non-interest income 4,361 4,561 4,644 4,744 4,981 5,184 5,418 5,481 5,573 5,662
17.22% 16.92% 16.63% 16.4% 16.5% 16.5% 16.5% 16.5% 16.5% 16.5%
Interest Income 1,304 1,147 1,118 1,118 1,065 1,071 1,034 1,017 1,076 1,149
18.73% 16.73% 15.96% 15% 14% 14% 14% 13% 13% 13%
18.36% 18.06% 18.44% 19.00% 18.93% 18.54% 18.43% 18.54% 18.56% 18.63%
ICS Net Interest Income 878 745 757 718 635 629 573 531 566 611
Total Revenue ICS 5,665 5,708 5,762 5,862 6,046 6,254 6,452 6,498 6,649 6,811
Global Commercial Services
19.27% 18.53% 18.21% 18.500% 18.500% 18.700% 19.100% 19.500% 19.900% 20.300%
Interest Income 9 11 13 14.5 14.8 14.9 14.4 15.2 16.1 17.1
0.13% 0.16% 0.19% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%
11.38% 11.55% 12.51% 12.5% 13.0% 13.0% 13.0% 13.0% 12.5% 12.5%
GCS Net Interest Income (255) (246) (232) (248) (281) (295) (311) (326) (327) (343)
Total Revenue GCS 4,889 5,006 5,098 5,366 5,600 5,890 6,287 6,493 6,737 6,983
Global Network & Merchant Services
18.6% 18.6% 18.7% 18.80% 19.00% 19.10% 19.20% 19.30% 19.40% 19.50%
Interest Income 5 23 32 29.0 29.6 29.7 28.7 30.4 32.1 34.3
0.07% 0.34% 0.46% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
Interest Expense (224) (243) (252) (284) (307) (329) (345) (362) (379) (398)
-9.66% -10.92% -12.87% -13.50% -13.50% -13.80% -13.80% -13.80% -13.80% -13.80%
GNMS Net Interest Income 229 266 284 313 336 359 374 392 411 432
Total Revenue GNMS 4,718 5,028 5,261 5,467 5,765 6,030 6,334 6,442 6,584 6,726
Corporate & Others
Non-interest income 719 924 846 868 906 1,005 1,051 1,063 1,081 1,098
2.84% 3.43% 3.03% 3.00% 3.00% 3.20% 3.20% 3.20% 3.20% 3.20%
Interest Income 413 331 277 290.29 295.92 297.43 287.09 303.58 321.23 342.95
5.93% 4.83% 3.95% 4% 4% 4% 4% 4% 4% 4%
Interest Expense 1,047 1,045 911 980 1049 1127 1184 1239 1312 1375
45.13% 46.95% 46.53% 46.60% 46.17% 47.26% 47.37% 47.26% 47.74% 47.67%
Corporate & Others Net Interest Income (634) (714) (634) (690) (753) (830) (897) (935) (991) (1,032)
Total Revenue Corporate & Others 1,132 1,255 1,123 1,158 1,202 1,303 1,338 1,367 1,402 1,441
Total Revenue 32,282 33,808 34,932 36,185 37,587 38,851 40,016 40,810 41,804 42,888
Net Interest Income 4,641 4,628 5,047 5,155 5,126 5,051 4,677 4,969 5,283 5,689
Page 14

Income Statement(In millions)
Fiscal Years Ending Dec. 31 2,011 2,012 2,013 2014E 2015E 2016E 2017E 2018E 2019E 2020 CV
Revenue
non-interest revenue
Discount revenue 16,734 17,739 18,695 19,660 20,709 21,720 22,915 23,037 23,405 23,759
Net card fees 2,183 2,506 2,631 2,644 2,749 2,867 2,940 3,039 3,156 3,240
Travel commissions & fees 1,971 1,940 1,913 1,901 1,873 1,853 1,890 1,906 1,896 1,890
Other commissions & fees 2,269 2,317 2,414 2,547 2,681 2,796 2,901 3,008 3,076 3,214
Securitization income, net - - - - - - - - - -
Other non-interest revenues 2,164 2,452 2,274 2,177 2,177 2,180 2,193 2,231 2,240 2,210
Total non-interest revenues 25,321 26,954 27,927 28,928 30,189 31,416 32,839 33,220 33,773 34,314
Interest Income
Interest income & fees on loans 6,537 6,511 6,718 6,966 7,125 7,150 6,878 7,279 7,705 8,156
Interest income - other 424 343 287 291 273 286 299 310 326 418
Total interest income 6,961 6,854 7,005 7,257 7,398 7,436 7,177 7,589 8,031 8,574
Total revenues before interest expenses 32,282 33,808 34,932 36,185 37,587 38,851 40,016 40,810 41,804 42,888
Interest Expense
Interest expense - deposits 528 480 442 459 482 506 532 558 586 616
Interest expense - short-term borrowings 11 - - - - - - - - -
Interest expense - long-term debt & other 1,781 1,746 1,516 1,643 1,789 1,878 1,968 2,062 2,162 2,269
Total interest expense 2,320 2,226 1,958 2,103 2,272 2,385 2,500 2,621 2,748 2,885
Net interest income 4,641 4,628 5,047 5,155 5,126 5,051 4,677 4,969 5,283 5,689
Total revenues, net of interest income 29,962 31,582 32,974 34,082 35,315 36,467 37,517 38,189 39,056 40,003
Total provisions for losses 1,112 1,990 2,110 2,203 2,331 2,466 2,610 2,762 2,923 3,094
Total revenues net of interest expense after provisions for losses 28,850 29,592 30,864 31,879 32,984 34,001 34,907 35,427 36,133 36,910
Expenses
Marketing, promotion, rewards & card member services 9,930 9,971 10,267 10,441 10,684 10,899 11,135 11,368 11,610 11,855
Salaries & employee benefits 6,252 6,597 6,191 6,347 6,378 6,305 6,343 6,342 6,330 6,339
Professional services expense 2,951 2,963 3,102 3,164 3,227 3,292 3,358 3,425 3,493 3,563
Other expenses, net 2,761 3,610 3,416 3,484 3,554 3,625 3,698 3,772 3,847 3,924
Total expenses 21,894 23,141 22,976 23,436 23,843 24,121 24,534 24,907 25,281 25,681
Pretax income from continuing operations 6,956 6,451 7,888 8,444 9,141 9,880 10,373 10,521 10,852 11,229
Income tax provision (benefit) 2,057 1,969 2,529 2,955 3,199 3,458 3,631 3,682 3,798 3,930
Income from continuing operations 4,899 4,482 5,359 5,488 5,942 6,422 6,743 6,838 7,054 7,299
Income (loss) from discontinued operations, net of tax 36 - - - - - - - - -
Net income (loss) 4,935 4,482 5,359 5,488 5,942 6,422 6,743 6,838 7,054 7,299
Per Share Information
Net earnings (loss) per share - basic 4.11 3.91 4.91 5.31 5.93 6.62 7.18 7.55 8.08 8.67
Dividends declared per common share 0.72 0.8 0.89 1.01 1.10 1.17 1.29 1.36 1.45 1.56
Year end shares outstanding (in Millions) 1164 1105 1064 1033 1002 970 939 906 873 842
2.42% 8.26% 8.08% 5.00% 1.42% 3.15% 3.47%
Page 15

Common Size Income Statement(In millions)
Fiscal Years Ending Dec. 31 2,011 2,012 2,013 2014E 2015E 2016E 2017E 2018E 2019E 2020 CV
Revenue
Common Size A1:U39Income Statement(In millions)
Discount revenue 10.91% 11.58% 12.19% 12.22% 12.32% 12.38% 12.49% 12.02% 11.69% 11.36%
Net card fees 1.42% 1.64% 1.72% 1.64% 1.64% 1.63% 1.60% 1.59% 1.58% 1.55%
Travel commissions & fees 1.29% 1.27% 1.25% 1.18% 1.11% 1.06% 1.03% 0.99% 0.95% 0.90%
Other commissions & fees 1.48% 1.51% 1.57% 1.58% 1.60% 1.59% 1.58% 1.57% 1.54% 1.54%
Securitization income, net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other non-interest revenues 1.41% 1.60% 1.48% 1.35% 1.30% 1.24% 1.19% 1.16% 1.12% 1.06%
Total non-interest revenues 16.51% 17.60% 18.21% 17.98% 17.96% 17.90% 17.89% 17.33% 16.87% 16.41%
Interest Income
Interest income & fees on loans 4.26% 4.25% 4.38% 4.33% 4.24% 4.07% 3.75% 3.80% 3.85% 3.90%
Interest income - other 0.28% 0.22% 0.19% 0.18% 0.16% 0.16% 0.16% 0.16% 0.16% 0.20%
Total interest income 4.54% 4.48% 4.57% 4.51% 4.40% 4.24% 3.91% 3.96% 4.01% 4.10%
Total revenues before interest expenses 21.05% 22.08% 22.78% 22.49% 22.37% 22.14% 21.80% 21.29% 20.88% 20.50%
Interest Expense
Interest expense - deposits 0.34% 0.31% 0.29% 0.29% 0.29% 0.29% 0.29% 0.29% 0.29% 0.29%
Interest expense - short-term borrowings 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Interest expense - long-term debt & other 1.16% 1.14% 0.99% 1.02% 1.06% 1.07% 1.07% 1.08% 1.08% 1.08%
Total interest expense 1.51% 1.45% 1.28% 1.31% 1.35% 1.36% 1.36% 1.37% 1.37% 1.38%
Net interest income 3.03% 3.02% 3.29% 3.20% 3.05% 2.88% 2.55% 2.59% 2.64% 2.72%
Total revenues, net of interest income 19.54% 20.62% 21.50% 21.19% 21.01% 20.78% 20.44% 19.92% 19.51% 19.13%
Total provisions for losses 0.73% 1.30% 1.38% 1.37% 1.39% 1.41% 1.42% 1.44% 1.46% 1.48%
Total revenues net of interest expense after provisions for losses 18.81% 19.32% 20.12% 19.82% 19.63% 19.38% 19.02% 18.48% 18.05% 17.65%
Expenses
Marketing, promotion, rewards & card member services 6.48% 6.51% 6.69% 6.49% 6.36% 6.21% 6.07% 5.93% 5.80% 5.67%
Salaries & employee benefits 4.08% 4.31% 4.04% 3.95% 3.80% 3.59% 3.46% 3.31% 3.16% 3.03%
Professional services expense 1.92% 1.93% 2.02% 1.97% 1.92% 1.88% 1.83% 1.79% 1.75% 1.70%
Other expenses, net 1.80% 2.36% 2.23% 2.17% 2.11% 2.07% 2.01% 1.97% 1.92% 1.88%
Total expenses 14.28% 15.11% 14.98% 14.57% 14.19% 13.75% 13.37% 12.99% 12.63% 12.28%
Pretax income from continuing operations 4.54% 4.21% 5.14% 5.25% 5.44% 5.63% 5.65% 5.49% 5.42% 5.37%
Total current income tax provision 1.01% 1.06% 1.65% 1.84% 1.90% 1.97% 1.98% 1.92% 1.90% 1.88%
Total deferred income tax provision (benefit) 0.33% 0.23% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Income tax provision (benefit) 1.34% 1.29% 1.65% 1.84% 1.90% 1.97% 1.98% 1.92% 1.90% 1.88%
Income from continuing operations 3.19% 2.93% 3.49% 3.41% 3.54% 3.66% 3.67% 3.57% 3.52% 3.49%
Income (loss) from discontinued operations, net of tax 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net income (loss) 3.22% 2.93% 3.49% 3.41% 3.54% 3.66% 3.67% 3.57% 3.52% 3.49%
Page 16

Balance Sheet (In millions)
Balance Sheet (In millions)
Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020CV
Assets
Cash & cash due from banks 3,514 2,020 2,212 2,983 3,329 3,551 3,948 3,831 3,356 2,796
Interest-bearing deposits in other banks 20,572 19,892 16,776 16,881 17,016 17,187 17,427 17,741 18,096 18,548
Short-term investment securities 807 338 498 473 449 427 406 385 366 348
Cash & cash equivalents 24,893 22,250 19,486 20,337 20,795 21,165 21,780 21,957 21,818 21,691
Accounts receivable - card member receivables 40,890 42766 44163 47,254 50,562 54,102 57,889 61,941 66,277 70,916
Reserve for losses 438 428 386 425 455 487 521 557 596 638
Accounts receivable - card member receivables, net 40452 42338 43777 46829 50107 53615 57368 61383 65680 70278
Accounts receivable - other receivables, net 3657 3576 3408 3811 3915 3847 3681 3699 3705 3724
Total Current assets 69002 68164 66671 70977 74817 78626 82829 87040 91203 95693
Loans - card member loans, net 60,747 63,758 65,977 69,276 72,740 76,377 80,195 84,205 88,415 92,836
Loans - other loans, net 419 551 608 620 633 645 658 671 685 698
Investment securities 7,147 5,614 5,016 4,511 4,387 4,263 4,139 4,015 3,961 3,907
Premises & equipment 8,114 9,064 9,853 11,053 12,253 13,503 14,753 16,003 17,303 18,603
Depreciation of premises and equipment 4,747 5,429 5,978 7,118 8,258 9,446 10,633 11,821 13,056 14,291
Premises & equipment, net 3,367 3,635 3,875 3,935 3,995 4,058 4,120 4,183 4,248 4,313
Goodwill 3,172 3,181 3,198 3,198 3,198 3,198 3,198 3,198 3,198 3,198
Deferred tax assets, net 2,875 2,458 2,443 2,443 2,443 2,443 2,443 2,443 2,443 2,443
Prepaid expenses 2,378 1,960 1,998 2,038 2,079 2,120 2,163 2,206 2,250 2,295
Other assets 4,230 3,819 3,589 3,879 3,762 3,744 3,795 3,767 3,769 3,777
Assets of discontinued operations - - - - - - - - - -
Total assets 153,337 153,140 153,375 160,878 168,053 175,473 183,541 191,728 200,172 209,160
Liability and Stockholders' Equity
Liability
Customer deposits 37,898 39,803 41,763 43,851 46,044 48,346 50,763 53,301 55,966 58,765
Travelers Cheques & other prepaid products 5,123 4,601 4,240 3,883 3,555 3,256 3,093 2,938 2,791 2,652
Accounts payable 10,458 10,006 10,615 11,216 11,851 12,521 13,230 13,979 14,770 15,606
Investment certificate reserves - - - - - - - - -
Short-term borrowings 3,424 3,314 5,021 5,121 5,224 5,328 5,435 5,544 5,654 5,768
Long-term debt 59,570 58,973 55,330 60,250 63,243 66,266 69,439 72,792 76,397 80,259
Other liabilities 18,070 17,557 16,910 15,835 16,103 16,319 16,677 16,781 16,597 16,460
Liabilities of discontinued operations - - - - - - - - - -
Total liabilities 134,543 134,254 133,879 140,156 146,019 152,036 158,637 165,336 172,176 179,510
Stockholders' Equity
Common shares 12,449 12,288 12,415 12,653 12,895 13,143 13,396 13,653 13,916 14,185
Retained earnings 7,221 7,525 8,507 9,495 10,564 11,720 12,934 14,165 15,505 16,892
Total accumulated other comprehensive income (loss) (876) (927) (1,426) (1,426) (1,426) (1,426) (1,426) (1,426) (1,426) (1,426)
Total shareholders' equity 18,794 18,886 19,496 20,722 22,034 23,437 24,904 26,392 27,995 29,651
Total Liability and Stockholders' Equity 153,337 153,140 153,375 160,878 168,053 175,473 183,541 191,728 200,172 209,160
Page 17

Common Size Balance Sheet (In millions)
Fiscal Years Ending Dec. 31 2,011 2,012 2,013 2014E 2015E 2016E 2017E 2018E 2019E 2020CV
Assets
Cash & cash due from banks 2.29% 1.32% 1.44% 1.85% 1.98% 2.02% 2.15% 2.00% 1.68% 1.34%
Interest-bearing deposits in other banks 13.42% 12.99% 10.94% 10.49% 10.13% 9.79% 9.50% 9.25% 9.04% 8.87%
Short-term investment securities 0.53% 0.22% 0.32% 0.29% 0.27% 0.24% 0.22% 0.20% 0.18% 0.17%
Cash & cash equivalents 16.23% 14.53% 12.70% 12.64% 12.37% 12.06% 11.87% 11.45% 10.90% 10.37%
Accounts receivable - card member receivables, net 26.38% 27.65% 28.54% 29.11% 29.82% 30.55% 31.26% 32.02% 32.81% 33.60%
Accounts receivable - other receivables, net 2.38% 2.34% 2.22% 2.37% 2.33% 2.19% 2.01% 1.93% 1.85% 1.78%
Total Current assets 45.00% 44.51% 43.47% 44.12% 44.52% 44.81% 45.13% 45.40% 45.56% 45.75%
Loans - card member loans, net 39.62% 41.63% 43.02% 43.06% 43.28% 43.53% 43.69% 43.92% 44.17% 44.39%
Loans - other loans, net 0.27% 0.36% 0.40% 0.39% 0.38% 0.37% 0.36% 0.35% 0.34% 0.33%
Investment securities 4.66% 3.67% 3.27% 2.80% 2.61% 2.43% 2.26% 2.09% 1.98% 1.87%
Premises & equipment, net 2.20% 2.37% 2.53% 2.45% 2.38% 2.31% 2.24% 2.18% 2.12% 2.06%
Goodwill 2.07% 2.08% 2.09% 1.99% 1.90% 1.82% 1.74% 1.67% 1.60% 1.53%
Deferred tax assets, net 1.87% 1.61% 1.59% 1.52% 1.45% 1.39% 1.33% 1.27% 1.22% 1.17%
Prepaid expenses 1.55% 1.28% 1.30% 1.27% 1.24% 1.21% 1.18% 1.15% 1.12% 1.10%
Other assets 2.76% 2.49% 2.34% 2.41% 2.24% 2.13% 2.07% 1.96% 1.88% 1.81%
Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Liability and Stockholders' Equity
Liability
Customer deposits 24.72% 25.99% 27.23% 27.26% 27.40% 27.55% 27.66% 27.80% 27.96% 28.10%
Travelers Cheques & other prepaid products 3.34% 3.00% 2.76% 2.41% 2.12% 1.86% 1.69% 1.53% 1.39% 1.27%
Accounts payable 6.82% 6.53% 6.92% 6.97% 7.05% 7.14% 7.21% 7.29% 7.38% 7.46%
Short-term borrowings 2.23% 2.16% 3.27% 3.18% 3.11% 3.04% 2.96% 2.89% 2.82% 2.76%
Long-term debt 38.85% 38.51% 36.07% 37.45% 37.63% 37.76% 37.83% 37.97% 38.17% 38.37%
Other liabilities 11.78% 11.46% 11.03% 9.84% 9.58% 9.30% 9.09% 8.75% 8.29% 7.87%
Total liabilities 87.74% 87.67% 87.29% 87.12% 86.89% 86.64% 86.43% 86.23% 86.01% 85.82%
Stockholders' Equity
Common shares 8.12% 8.02% 8.09% 7.86% 7.67% 7.49% 7.30% 7.12% 6.95% 6.78%
Retained earnings 4.71% 4.91% 5.55% 5.90% 6.29% 6.68% 7.05% 7.39% 7.75% 8.08%
Total accumulated other comprehensive income (loss) -0.57% -0.61% -0.93% -0.89% -0.85% -0.81% -0.78% -0.74% -0.71% -0.68%
Total shareholders' equity 12.26% 12.33% 12.71% 12.88% 13.11% 13.36% 13.57% 13.77% 13.99% 14.18%
Total Liability and Stockholders' Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Page 18

Cash Flow Statement
Fiscal Years Ending Dec. 31 2007 2008 2009 2010 2011 2012 2013
Cash Flows from Operating Activities
Net income 4012 2699 2130 4057 4935 4482 5359
Loss (income) from discontinued operations, net of tax 36 172 7 - -36 - -
Income from continuing operations 4048 2871 2137 4057 4899 4482 5359
Provisions for losses 4527 6290 5313 2207 1112 1990 2110
Depreciation & amortization 648 712 1070 917 918 991 1020
Deferred taxes & other -738 442 -1429 1135 818 218 -283
Stock-based compensation 276 229 202 287 301 297 350
Accounts receivable -912 - - - - - -
Other receivables - 101 -730 -498 663 153 -73
Other assets -139 -2223 526 -590 -635 390 335
Accounts payable & other liabilities 1005 885 -23 2090 2893 -358 88
Travelers Cheques & other prepaid products -22 -770 -449 -317 -494 -540 -359
Premium paid on debt exchange - - - - - -541 -
Net cash provided by (used in) operating activities attributable to discontinued operations -209 129 -233 - - - -
Net cash flows from operating activities 8484 8666 6384 9288 10475 7082 8547
Cash Flows from Investing Activities
Sale of investments 4901 4657 2930 2196 1176 525 217
Maturity & redemption of investments 7100 9620 2900 12066 6074 1562 1292
Purchase of investments -10332 -14724 -13719 -7804 -1158 -473 -1348
Net decrease (increase) in cardmember loans or receivables -18903 5448 6154 -6389 -8358 -6671 -6301
Proceeds from cardmember loan securitizations 5909 9619 2244 - - - -
Maturities of cardmember loan securitizations -3500 -4670 -4800 - - - -
Loan operations & principal collections, net 25 - - - - - -
Purchase of land, buildings & equipment -938 -977 -772 -887 -1189 -1053 -1006
Sale of land, buildings & equipment 55 27 50 9 - - -
Dispositions (acquisitions), net of cash acquired or sold -124 -4589 - -400 -610 -466 -195
Net decrease (increase) in restricted cash - - -1935 -20 3574 31 72
Net cash provided by investing activities attributable to discontinued operations -1287 2625 196 - - - -
Net cash flows from investing activities -17094 7036 -6752 -1229 -491 -6545 -7269
Cash Flows from Financing Activities
Net change in interest-bearing deposits - - 11037 3406 - - -
Net increase in customer deposits 3361 358 - - 8232 2300 1195
Sale of investment certificates 3427 - - - - - -
Redemption of investment certificates -4219 - - - - - -
Net increase (decrease) in short-term borrowings 5338 -8693 -6574 1056 -2 -1015 1843
Issuance of long-term debt - 19213 6697 5918 13982 13934 11995
Principal payments on long-term debt - -13787 -15197 -17670 -21029 -14076 -14763
Issuance of American Express Series A preferred shares & warrants - - 3389 - - - -
Issuance of American Express common shares - 176 614 663 594 443 721
Repurchase of American Express Series A preferred shares - - -3389 - - - -
Repurchase of American Express stock warrants - - -340 - - - -
Repurchase of American Express common shares -3572 -218 - -590 -2300 -3952 -3943
Dividends paid -712 -836 -924 -867 -861 -902 -939
Issuance of debt 27353 - - - - - -
Principal payments on debt -18390 - - - - - -
Issuance of American Express common shares & other financing activities 852 - - - - - -
Net cash provided by (used in) financing activities attributable to discontinued operations 2028 -6653 40 - - - -
Net cash flows from financing activities 15466 -10440 -4647 -8084 -1384 -3268 -3891
Page 19

Cash Flow Statement
Cash Flows from Operating Activities
Net income 4935 4482 5359 5,488 5,942 6,422 6,743 6,838 7,054 7,299
Non-cash items
Depreciation & amortization 918 991 1020 1,140 1,140 1,188 1,188 1,188 1,235 1,235
Adjustment of assets and liabilities
Change in account receivable 301 297 350 (3,052) (3,278) (3,508) (3,753) (4,016) (4,297) (4,598)
Change in accounts receivable - other receivables, net (403) (104) 6 8 166 (18) (6) (18)
Change in customer deposit 2,088 2,193 2,302 2,417 2,538 2,665 2,798
Change in travelers Cheques & other prepaid products -494 -540 -359 (357) (327) (300) (163) (155) (147) (140)
Change in account payable 663 153 -73 601 635 671 709 749 791 836
Other assets -635 390 335 (290) 117 1 9 (52) 2 8 (2) (8)
other liabilities 2893 -358 88 (1,075) 268 216 358 104 (184) (137)
Change in prepaid expense (40) (41) (42) (42) (43) (44) (45)
Net cash flows from operating activities 10475 7082 8547 4,099 6,544 7,036 7,570 7,214 7,066 7,222
Cash Flows from Investing Activities
Sale of investments 1176 525 217 505 124 124 124 124 5 4 5 4
Maturity & redemption of investments 6074 1562 1292 2 5 2 4 2 2 2 1 2 0 1 9 1 8
Proceeds from card member loan securitizations - - - (3,311) (3,476) (3,650) (3,832) (4,023) (4,224) (4,434)
Purchase of land, buildings & equipment -1189 -1053 -1006 (1,200) (1,200) (1,250) (1,250) (1,250) (1,300) (1,300)
Net cash flows from investing activities -491 -6545 -7269 (3,981) (4,529) (4,753) (4,936) (5,129) (5,450) (5,662)
Cash Flows from Financing Activities
Net change in interest-bearing deposits - - - (105) (135) (170) (241) (314) (355) (452)
Net increase (decrease) in short-term borrowings -2 -1015 1843 100 102 104 107 109 111 113
Issuance of long-term debt 13982 13934 11995 4,920 2,993 3,023 3,173 3,353 3,605 3,862
Change in accumulated other comprehensive income (loss) - - - - - - - - - -
Change in common shares 594 443 721 238 243 247 253 258 263 269
Repurchase of American Express common shares -2300 -3952 -3943 (3,458) (3,773) (4,129) (4,315) (4,377) (4,444) (4,598)
Dividends paid -861 -902 -939 (1,043) (1,099) (1,137) (1,214) (1,231) (1,270) (1,314)
Net cash flows from financing activities -1384 -3268 -3891 652 (1,669) (2,061) (2,238) (2,202) (2,090) (2,120)
Net increase (decrease) in cash & cash equivalents 8537 -2643 -2764 771 346 222 396 (117) (475) (560)
Cash & cash equivalents at beginning of year 16356 24893 22250 2,212 2,983 3,329 3,551 3,948 3,831 3,356
Cash & cash equivalents at end of year 24893 22250 19486 2,983 3,329 3,551 3,948 3,831 3,356 2,796
Page 20

Weighted Average Cost of Capital (WACC) Estimation
Beta 1.176
Risk-free Rate 3.05%
Equity Risk Premium 4.64%
Cost of Equity 8.51%
Re(Cost of Equity)=Rf + β(Rm-Rf): 3.05% +1.176* 4.64% = 8.51%
Risk free rate = 30 year Treasury bond yield as 10/30/2014
Beta = Bloomberg Raw Beta as 10/29/2014
Equity Risk Premium = Geometric risk premium from 1928-2013
Key Assumptions of Valuation Model
Ticker Symbol AXP
Current Share Price 90.58
Fiscal Year End Dec. 31
Beta 1.176
Risk-Free Rate 3.05%
Equity Risk-Premium 4.64%
CV Growth of NOPLAT 3.50%
Page 21

Value Driver Estimation
Net Income 4,935 4,482 5,359 5,488 5,942 6,422 6,743 6,838 7,054 7,299
Total Assets 153,337 153,140 153,375 160,878 168,053 175,473 183,541 191,728 200,172 209,160
Total Liabilities 134,543 134,254 133,879 140,156 146,019 152,036 158,637 165,336 172,176 179,510
Beg. Shareholders' equity 16,230 18,794 18,886 19,496 20,722 22,034 23,437 24,904 26,392 27,995
Return on Equity 30.41% 23.85% 28.38% 28.15% 28.67% 29.15% 28.77% 27.46% 26.73% 26.07%
Net Income 4,935 4,482 5,359 5,488 5,942 6,422 6,743 6,838 7,054 7,299
Less Change in Total Assets 6295 -197 235 7503 7176 7420 8067 8187 8444 8989
Plus Change in Liabilities 3731 -289 -375 6277 5864 6017 6601 6699 6841 7333
Free Cash Flow Equity - Simple 2371 4390 4749 4263 4630 5018 5276 5350 5451 5643
Free Cash Flow Equity - Formal
Total Interest Income 6,961 6,854 7,005 7,257 7,398 7,436 7,177 7,589 8,031 8,574
Less Interest Expense 2,320 2,226 1,958 2,103 2,272 2,385 2,500 2,621 2,748 2,885
Less Provision for Credit Loss 1,112 1,990 2,110 2,203 2,331 2,466 2,610 2,762 2,923 3,094
Plus Non-Interest Revenue 25,321 26,954 27,927 28,928 30,189 31,416 32,839 33,220 33,773 34,314
Less Non-Interest Expense 21,894 23,141 22,976 23,436 23,843 24,121 24,534 24,907 25,281 25,681
Plus Income from Discontinued Operations 36 - - - - - - - - -
Less Taxes 2,057 1,969 2,529 2,955 3,199 3,458 3,631 3,682 3,798 3,930
Cash From Operations 4,935 4,482 5,359 5,488 5,942 6,422 6,743 6,838 7,054 7,299
Change in customer deposits 8,171 1,905 1,960 2,088 2,193 2,302 2,417 2,538 2,665 2,798
Change in travelers cheques and other prepaid expenses (495) (522) (361) (357) (327) (300) (163) (155) (147) (140)
Change in Investment certificate reserves -
Change in accounts payable 767 (452) 609 601 635 671 709 749 791 836
Change in short-term borrowing 10 (110) 1,707 100 102 104 107 109 111 113
Change in long-term debt (6,846) (597) (3,643) 4,920 2,993 3,023 3,173 3,353 3,605 3,862
Change in other liabilities 2,124 (513) (647) (1,075) 268 216 358 104 (184) (137)
Change in Discontinued items assets - - - - - - - - - -
Sources of Cash 3,731 (289) (375) 6,277 5,864 6,017 6,601 6,699 6,841 7,333
Uses of Cash
Change in cash and cash due from banks 1,016 (1,494) 192 771 346 222 396 (117) (475) (560)
Change in interest bearing deposits 7,015 (680) (3,116) 105 135 170 241 314 355 452
Change in short-term investments 153 (469) 160 (25) (24) (22) (21) (20) (19) (18)
Change in total cash and cash equivalent
Change in card member receivables 3,572 1,886 1,439 3,052 3,278 3,508 3,753 4,016 4,297 4,598
Change in other receivables 103 (81) (168) 403 104 (68) (166) 18 6 18
Change in card member loans 3,543 3,011 2,219 3,299 3,464 3,637 3,819 4,010 4,210 4,421
Change in other loans 7 132 57 12 12 13 13 13 13 14
Change in investment securities (6,863) (1,533) (598) (505) (124) (124) (124) (124) (54) (54)
Change in premises and equipment 462 268 240 60 60 63 63 63 65 65
Change in other assets (2,713) (1,237) (190) 330 (76) 23 94 15 46 53
Change in Discontinued items - - - - - - - - - -
Uses of Cash 6,295 (197) 235 7,503 7,176 7,420 8,067 8,187 8,444 8,989
Free Cash Flow Equity - Formal 2,371 4,390 4,749 4,263 4,630 5,018 5,276 5,350 5,451 5,643
Equity Economic Profit (Equity EP)
Net Income 4,935 4,482 5,359 5,488 5,942 6,422 6,743 6,838 7,054 7,299
Beg. Shareholder's Equity 16,230 18,794 18,886 19,496 20,722 22,034 23,437 24,904 26,392 27,995
Return on Equity 30.41% 23.85% 28.38% 28.15% 28.67% 29.15% 28.77% 27.46% 26.73% 26.07%
Cost of Equity 8.51% 8.51% 8.51% 8.51% 8.51% 8.51% 8.51% 8.51% 8.51% 8.51%
Equity Economic Profit 3554.4 2883.3 3752.4 3830.0 4178.9 4547.5 4748.9 4720.0 4808.9 4917.3
Page 22

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 3.50%
CV ROE 25.32%
Fiscal Years Ending Dec. 31 2014E 2015E 2016E 2017E 2018E 2019E 2020CV
DCF Model
FCFE 4263 4630 5018 5276 5350 5451 5643
Net Income 5488 5942 6422 6743 6838 7054 7299
Discount Period 1 2 3 4 5 6 6
Discount Factor 0.92160 0.84935 0.78276 0.72140 0.66484 0.61272 0.61272
CF_CV 125631
DCF 3929 3932 3928 3806 3557 3340 76977
V (e) 99469
-Employee stock option -1150
value of equity 98319
Share outstanding 1033
Price/Share 95.14
EP Model
EP 3830 4179 4547 4749 4720 4809 4917
Discount period 1 2 3 4 5 6 6
Discount Factor 0.92160 0.84935 0.78276 0.72140 0.66484 0.61272 0.61272
CV_PE 97636
PV of EP 3530 3549 3560 3426 3138 2947 59824
PV of EP 79973
Beg. TSE 19496
V (e) 99469
-Employee stock option -1150
value of equity 98319
Share outstanding 1033
Price/Share 95.14
Price/Share Partial Year Adjustment
as of 11/17/2014 101.34
Page 23

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Key Assumptions
CV growth 3.50%
CV ROE 25.32%
Fiscal Years Ending Dec. 31 2014E 2015E 2016E 2017E 2018E 2019E 2020 CV
EPS $ 5.31 $ 5.93 $ 6.62 $ 7.18 $ 7.55 $ 8.08 $ 8.67
DIV 1.01 1.10 1.17 1.29 1.36 1.45 7.47
Future Stock Price 149.2
DIV Payout Ratio 19.00% 19.00% 19.00% 18.20% 18.20% 18.20% 86.18%
Discount period 1 2 3 4 5 6 6
Discount Factor 0.92 0.85 0.78 0.72 0.66 0.61 0.61
Discount Cash Flow 0.93 0.93 0.92 0.93 0.90 0.89 91.42
Intrinsic Value 96.93
Intrinsic Value Partial Year Adjusted
as of 11/17/2014 103.26
Page 24

Relative Valuation Models
Stock Prices as of :
11/18/2014 EPS EPS Est.
Ticker Company Price 2014E 2015E P/E 14 P/E 15 5yr Gr. PEG 14 PEG 15 P/B 14
COF CAPITAL ONE FINANCIAL $ 81.29 $7.615 $7.734 10.7 10.51 6.77% 1.58 1.55 1.04
MA MASTERCARD INCORPORATED $ 83.90 $3.003 $3.561 27.9 23.56 16.48% 1.70 1.43 14.98
DFS DISCOVER FINANCIAL SERVICES $ 64.98 $5.231 $5.596 12.4 11.61 8.07% 1.54 1.44 2.8
V VISA Inc $ 249.73 $9.000 $10.378 27.7 24.06 20.81% 1.33 1.16 7
JPM JPMORGAN CHASE & CO. $ 60.53 $5.485 $5.955 11.0 10.16 7.13% 1.55 1.43 1.08
BAC BANK OF AMERICA Corp $ 17.14 $1.457 $1.500 11.8 11.43 8.00% 1.47 1.43 0.82
C CITIGROUP Inc $ 53.81 $3.508 $5.417 15.3 9.93 10.06% 1.52 0.99 0.8
USB U.S. BANCORP $ 43.98 $3.079 $3.317 14.3 13.26 7.21% 1.98 1.84 2.05
Average 16.4 14.32 10.57% 1.58 1.41 3.82
AXP AMERICAN EXPRESS COMPANY $ 90.58 $5.31 $5.93 17.1 15.3 8.99% 1.9 1.7 4.71
Implied Value:
Relative P/E (EPS14) $ 87.10
Relative P/E (EPS15) $ 84.92
Avg: $ 86.01
PEG Ratio (EPS14) $ 75.58
PEG Ratio (EPS15) $ 75.02
Avg: $ 75.30
Book Value/Share $ 20.05
P/B multiple 3.82
P/B 14 $ 76.62
Page 25

Key Management Ratios
Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020CV
Profitability Ratios
Return on Equity 28.18% 23.79% 27.92% 27.29% 27.79% 28.25% 27.90% 26.66% 25.94% 25.32%
Net Profit Margin 15.29% 13.26% 15.34% 15.17% 15.81% 16.53% 16.85% 16.76% 16.87% 17.02%
Net Interest Margin 3.48% 3.42% 3.73% 3.64% 3.45% 3.24% 2.87% 2.90% 2.93% 3.00%
Return on Assets 3.29% 2.92% 3.50% 3.49% 3.61% 3.74% 3.76% 3.64% 3.60% 3.57%
Liquidity Ratios
Current Ratio 1.14 1.12 1.00 1.11 1.12 1.13 1.14 1.15 1.15 1.16
Cash ratio 41.26% 36.45% 29.23% 31.74% 31.19% 30.47% 30.03% 28.98% 27.55% 26.20%
Activity or Asset-Management Ratios
Receivables Turnover 0.75 0.71 0.72 0.70 0.68 0.66 0.63 0.60 0.57 0.54
Total Asset Turnover 0.21 0.22 0.23 0.23 0.23 0.23 0.22 0.22 0.21 0.21
Financial Leverage Ratios
Debt-to-Equity Ratio 7.16 7.11 6.87 6.76 6.63 6.49 6.37 6.26 6.15 6.05
Debt Ratio 0.877 0.877 0.873 0.871 0.869 0.866 0.864 0.862 0.860 0.858
Payout Policy Ratios
Dividend Payout Ratio 17.57% 19.21% 16.83% 19.00% 18.50% 17.70% 18.00% 18.00% 18.00% 18.00%
Total Payout Ratio 64.05% 108.30% 91.10% 82.00% 82.00% 82.00% 82.00% 82.00% 81.00% 81.00%
Profitability Ratios
Return on Equity= Net Income/ Average Shareholder's Equity
Net Profit Margin=Net Income/Total Revenue
Net Interest Margin= (Investment Returns- Interest Expense)/Average Earning Assets
Return on Assets=Net income/Average Total Assets
Liquidity Ratios
Current Ratio= Current Assets/ Current Liabilities
Cash Ratio=(Cash+Cash Equivalents)/Current Liabilities
Activity or Asset-Management Ratios
Receivables Turnover= Total Revenue/Average Account Receivable
Total Asset Turnover= Total Revenue/Average Total Assets
Financial Leverage Ratios
Debt-to-Equity Ratio=Total Debt/Total Shareholders' Equity
Debt Ratio = Total Debt/Total Assets
Payout Policy Ratios
Dividend Payout Ratio= Dividend pay/Net Income
Total Payout Ratio = (Common Shares Repurchase + Dividend pay)/Net Income
Page 26

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 28,193,000
Average Time to Maturity (years): 4.26
Expected Annual Number of Options Exercised: 6,611,699
Current Average Strike Price: $ 47.32
Cost of Equity: 8.51%
Current Stock Price: $ 90.58
2014E 2015E 2016E 2017E 2018E 2019E 2020CV
Increase in Shares Outstanding: 6,611,699 6,611,699 6,611,699 6,611,699 1,719,042 0 0
Average Strike Price: $ 47.32 $ 47.32 $ 47.32 $ 47.32 $ 47.32 $ 47.32 $ 47.32
Increase in Common Stock Account: 312,892,944 312,892,944 312,892,944 312,892,944 81,352,165 - -
Change in Treasury Stock 3,457,722,964 3,772,955,422 4,129,206,515 4,315,258,050 4,376,605,855 4,444,031,341 4,598,190,855
Expected Price of Repurchased Shares: $ 90.58 $ 98.29 $ 106.65 $ 115.72 $ 125.56 $ 136.24 $ 147.83
Number of Shares Repurchased: 38,173,139 38,387,784 38,718,779 37,291,127 34,856,186 32,618,442 31,104,039
Shares Outstanding (beginning of the year) 1,065,000,000 1,033,438,560 1,001,662,475 969,555,395 938,875,967 905,738,823 873,120,381
Plus: Shares Issued Through ESOP 6,611,699 6,611,699 6,611,699 6,611,699 1,719,042 0 0
Less: Shares Repurchased in Treasury 38,173,139 38,387,784 38,718,779 37,291,127 34,856,186 32,618,442 31,104,039
Shares Outstanding (end of the year) 1,033,438,560 1,001,662,475 969,555,395 938,875,967 905,738,823 873,120,381 842,016,342
Page 27

VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol AXP
Current Stock Price 90.58
Risk Free Rate 1.30%
Current Dividend Yield 1.40%
Annualized St. Dev. of Stock Returns 16.24%
Average Average B-S Value
Range of Number Exercise Remaining Option of Options
Outstanding Options of Shares Price Life (yrs) Price Granted
Range 1 18,615,000 44.98 4.40 $ 42.84 $ 797,522,496
Range 2 9,578,000 51.88 4.00 $ 36.77 $ 352,228,238
Total 28,193,000 $ 47.32 4.26 $ 45.93 $ 1,149,750,734
Page 28

Sensitivity Analysis
ROE
$ 101.34 23.50% 24.00% 24.50% 25.32% 25.50% 26.00% 26.50% 27% 27.5%
2.75% 92.63 92.82 93.01 93.30 93.37 93.53 93.70 93.85 94.00
3.00% 94.97 95.19 95.41 95.74 95.81 96.00 96.19 96.36 96.53
CV 3.25% 97.53 97.78 98.03 98.41 98.49 98.70 98.91 99.11 99.31
Growth 3.50% 100.35 100.63 100.91 101.34 101.43 101.67 101.91 102.14 102.36
3.75% 103.46 103.78 104.10 104.58 104.68 104.96 105.22 105.48 105.73
4.00% 106.92 107.28 107.64 108.18 108.30 108.61 108.91 109.20 109.47
4.25% 110.78 111.20 111.59 112.20 112.33 112.68 113.02 113.35 113.66
CV Cost of Equity
$ 101.34 7.75% 8.00% 8.25% 8.5% 8.75% 9.00% 9.25% 9.50% 9.75%
2.75% 107.65 102.45 97.73 93.31 89.46 85.83 82.48 79.37 76.49
3.00% 111.17 105.56 100.47 95.74 91.64 87.78 84.23 80.95 77.92
CV 3.25% 115.08 108.98 103.50 98.41 94.02 89.90 86.13 82.66 79.45
Growth 3.50% 119.45 112.79 106.84 101.34 96.63 92.22 88.19 84.51 81.11
3.75% 124.37 117.05 110.55 104.58 99.49 94.75 90.45 86.52 82.91
4.00% 129.95 121.84 114.70 108.18 102.66 97.54 92.91 88.71 84.87
4.25% 136.32 127.27 119.36 112.21 106.18 100.62 95.63 91.11 87.00
MRP
$ 101.34 3.75% 4.00% 4.25% 4.64% 4.75% 5.00% 5.25% 5.50% 5.75%
1.00 153.98 143.10 133.65 121.17 118.06 111.55 105.72 100.47 95.71
1.05 145.67 135.44 126.55 114.79 111.86 105.72 100.22 95.26 90.77
1.10 138.22 128.56 120.16 109.05 106.28 100.47 95.26 90.57 86.31
Beta 1.18 128.24 119.34 111.60 101.34 98.78 93.41 88.60 84.25 80.31
1.20 125.38 116.70 109.14 99.13 96.63 91.38 86.68 82.44 78.59
1.25 119.81 111.55 104.36 94.81 92.43 87.43 82.95 78.90 75.23
1.30 114.71 106.84 99.97 90.86 88.58 83.81 79.52 75.65 72.14
CV Percentage Fees Charged on Merchants
$ 101.34 1.63% 1.65% 1.68% 1.70% 1.73% 1.75% 1.78% 1.80% 1.83%
3.50% 90.66 93.51 96.36 99.21 102.07 104.92 107.77 110.62 113.48
CV 4.00% 91.68 94.54 97.41 100.28 103.14 106.01 108.88 111.74 114.61
Billed Business 4.50% 92.70 95.58 98.46 101.34 104.22 107.10 109.98 112.86 115.74
(% growth) 5.00% 93.72 96.62 99.51 102.40 105.30 108.19 111.09 113.98 116.87
5.50% 94.75 97.65 100.56 103.47 106.38 109.28 112.19 115.10 118.01
6.00% 95.77 98.69 101.61 104.53 107.45 110.38 113.30 116.22 119.14
6.50% 96.79 99.73 102.66 105.60 108.53 111.47 114.40 117.34 120.27
CV Effective Interest Rate on Card Member Loan
$ 101.34 8.10% 8.30% 8.50% 8.72% 9.00% 9.20% 9.40% 9.60% 9.80%
3.50% 91.88 93.28 94.67 96.20 98.16 99.56 100.95 102.35 103.74
4.00% 93.40 94.84 96.28 97.87 99.89 101.33 102.77 104.22 105.66
CV 4.50% 94.96 96.45 97.94 99.58 101.67 103.16 104.65 106.14 107.64
Card Member Loan 5.00% 96.56 98.11 99.65 101.34 103.50 105.05 106.59 108.13 109.67
(% growth) 5.50% 98.22 99.81 101.41 103.16 105.39 106.99 108.58 110.17 111.77
6.00% 99.92 101.57 103.22 105.03 107.34 108.99 110.63 112.28 113.93
6.50% 101.68 103.38 105.09 106.95 109.34 111.04 112.75 114.45 116.15
Page 29

AXP Applied Equity Valuation new version

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (18)

Similar a AXP Applied Equity Valuation new version

Similar a AXP Applied Equity Valuation new version (20)

AXP Applied Equity Valuation new version