American Express: To Buy or Not to Buy (Part 4: DCF part B)

Previously, I had ran three different basic models to determine AMEX’s intrinsic value of $80/share.

Now, I will use the WACC discount rate instead of just relying on Cost of Equity (6.28%) alone (see this link for prior blog)

According to Investopedia, this is the entire formula of WACC:

1.jpg

Pretty complicated, and yes it is.

To outline and give number to these variables:

Re=6.28%

Rd=4.33%*

E=73,730 million USD

D=51,813 million USD

V= 125,543 million USD

E/V=59%

D/V=41%

Tc=34%

WACC=4.84%

*I believe this Youtube video by Matt Kermode best explains how to perform a WACC application to any company–so long as an investor is able to determine at what required rate of return a company’s debt has to offer (Rd). Link: https://www.youtube.com/watch?v=EZw-Ca0A37Q

Proceeding to a no growth (0%)  rate with 10-year period. I arrived at $129/share.

Involving the previous three IVs calculated averaging them, I arrived at an intrinsic value of $92.25/share. Whereby, the current price of $72.42 is at a 27% discount—nearing my threshold of 30% margin of safety.

$92.25/share would give a current PE valuation of 16, which is a overvalued in terms of AMEX’s industry peers of 13 according to Yahoo Finance.

-End-

Disclosure: I do not have shares in any of the companies mentioned in this article and don’t plan to initiate purchase within the next 24 hours. I would not receive any compensation for doing this article. I am not a professional financial analyst. This is just a hobby. Lastly, my work is not error-free, but I strive for it to be. Do not consider as a buy or sell advice. Invest at your own risk.

If you are interested in this similar approach to investing and would seek updates or share ideas, I wish to invite you to this Facebook group SEEKING VALUE (https://www.facebook.com/groups/SeekingValue/?ref=bookmarks)

Happy investing.

Mark Y.

 

 

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