Valuation of AMEX in 1964 (Part 2)

Business operations

AMEX business operations in 1964 was made up of:oldaxp

  • Traveler cheques
  • Travel
  • Credit cards
  • Money orders and utility bills
  • Commercial banking overseas
  • Banking offices – military bases
  • Foreign remittances and exchange
  • International freight
  • Wells Fargo & Company (wholly owned subsidiary) – armored car operations and coin sorting and packaging activities
  • Hertz American Express International, Ltd. (subsidiary, 49% ownership stake)

See annual report for description of the different operating segments.

Earnings Power

American Express (AMEX) back in 1964 was a growing business that had been able to show strong earnings growth and consistent returns on invested capital from 1954 to 1964.

From 1954 to 1964 AMEX grew its revenue from operations at a compounded annual growth rate (CAGR) of 12.1%, from $42,219,000  to $118,144,000. Total revenues, that is including profit on sales of securities, grew at a CAGR of 11.8% from $43,534,000 to $118,441,000. During the same period operating profit and net income grew at a CAGR of 14.0% and 9.7% respectively. Earnings per share in 1964 amounted to $2.81 compared to $1.22 in 1954, a CAGR of 9,7%, and average earnings per share was $1.95.

The undistributed earnings ($442,041) from Hertz in 1964 has not been included in earnings above. Approximately 2-4 percent when compared to net income.

In 1964 the operating margin was 17.2%, this compared to 14.4% in 1954 and to the 10-year average operating margin of 14.7%.

AMEX paid dividends every year that grew from $0.64 per share in 1954 to $1.40 per share in 1964, a CAGR of 9.1%. The ninety-fifth consecutive year of dividend payments.

So far we can see consistency in the financial data. Let’s take a loot at what the business had to invest to be able to generate these profits.

Invested Capital

Total shareholders’ equity amounted to $83,612,591 or $18.74 per share in 1964 compared to $44,296,00 or $9.93 in 1954, a CAGR of 7.3%. During this time period the average dividend payout ratio was approximately 56%.

Return on average equity was 15.5% in 1965, this compared to 13.9% in 1954 and to an average return on average equity of 15.0% during 1954 and 1964.

A quick read of the 1964 consolidated balance sheet shows:

  • ASSETS
    • Cash and due from banks, $263.841.861 (23.5% of total assets)
    • Total security investments, $507,757,050 (45.2% of total assets)
    • U.S. Government depository bonds, $40,000,000 (3.6% of total assets)
    • Loans and discounts, $186,638,154 (16.6% of total assets)
    • Accounts receivable and accrued interest, $70,703,625 (6.3% of total assets)
  • LIABILITIES
    • Travelers Cheques and Travelers Letter of Credit, $525.667.060 (46.8% of total assets)
    • Customers’ deposits and credit balances held by The American Express Company, Incorporated, $387,697,073 (34.5% of total assets)
    • Deposit liability relating to U.S. Government depository bonds, $40,000,000 (3.6% of total assets)
  • SHAREHOLDERS’ EQUITY
    • Total shareholders’ equity, $83,612,591 (of which Surplus makes up $61,307,301). 6.2% higher compared to prior year and approximately 89% higher compared to 1954.

The business in two words – Consistent growth

So what we can see is that AMEX back in 1964 was a consistently growing business able to maintain high returns on invested equity capital.

The main problem in four words – the Salad Oil Scandal

Before looking at the fraud that occurred, i.e. the Salad Oil Scandal, making an attempt to value the business as a going concern makes sense, because this makes it possible to compare any liabilities arising from the fraud to an estimated intrinsic value of the business.

Valuing AMEX in 1964

As of 1964 AMEX is a high return business with favorable long-term growth prospects. Below is my valuation in summary. Looking first at the downside protection (without considering the fraud at the moment) book value per share of $18.74 per share seems like a conservative estimate of intrinsic value. Assets are liquid and there are no intangibles. The liabilities side of the balance sheet is pretty clean.

A business like AMEX in 1964 should be valued above book value, this due to the high and consistent returns on invested equity capital coupled with favorable growth prospects going forward.

My estimate of intrinsic value, which is at the high end of the value range, points to a value around $60 per share.

Valuation AMEX in 1964

See graph below for the Aaa Corporate Bond Yield from Moody’s in 1964.

Aaa1964

So, with an intrinsic value around $60 per share, it’s time to go find the share price data to see where an investor could have bought the stock and become a part owner of the business.

That’s all for now. Please feel free to leave a comment and share your thoughts and insight.

Does an intrinsic value of $60 per share seem reasonable? Or is it too high?

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