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Warren Buffett is making a splash with his buyout of Precision Castparts (NYSE: PCP), but one of his core holdings is also a name to watch right now.
The large activist hedge fund, ValueAct Capital, is targeting American Express (NYSE: AXP). It’s rumored that the fund, run by Jeff Ubben, has a $1 billion stake in the credit card company. That would be a roughly 1.2% stake.
As noted, ValueAct is in good company. AmEx is a Buffett favorite. His Berkshire Hathaway (NYSE: BRK-B) owns 15% of the company, and it’s one of Berkshire’s top five holdings.
As far as ValueAct goes, the position is still a small part of its portfolio and not yet what it calls a “core active position.” American Express, with a near $80 billion market cap, is just the latest blue-chip stock that’s being targeted by an activist investor. With some $130 billion in assets under management, activist investors are getting more aggressive (read: targeting larger companies).
Recall that Carl Icahn has been battling with Apple (NASDAQ: AAPL), a $658 billion market cap electronics company, and Bill Ackman just announced a 7.5% stake in the $74 billion foods company Mondelez (NASDAQ: MDLZ).
Shares Look Cheap
Despite the recent surge in American Express stock, up 5% over the last week on the ValueAct news, shares are still down close to 14% year-to-date. Meaning, shares are still enticingly cheap. American Express trades at a price-earnings ratio of 14, while other payments companies are well above that. Those include Visa (NYSE: V) and MasterCard (NYSE: MA), which trade at around 24 times earnings.
Let’s not forget American Express’ 1.5% dividend yield, where its dividend payment is just a 20% payout of earnings.
Back in May, I called American Express one of Warren Buffett’s forever stocks. It’s a company with a strong reputation that’s been beaten down due to some credit card contract losses, namely Costco (NASDAQ: COST), and the bigger worry is that mobile payments will lead to decreased card usage. But just because you aren’t swiping a credit card doesn’t mean you aren’t still paying with one.
AmEx is still a wide moat company, something that Buffett loves. The company has a strong brand and loyal customers. Its initiatives to help build customer loyalty have also helped with increasing customer spending. Plus, American Express has relationships with more than 700,000 merchants across the U.S.
Guidance Needed
Now, ValueAct is a shareholder-friendly activist and will likely take a constructive approach if it does decide to get more involved with American Express.
American Express is a company in need of some guidance. This comes after it ended its 16-year relationship with Costco as mentioned, which included a co-branded card and being the only credit card accepted at Costco locations. The company is also in no-man’s land in terms of management, with the assumed successor for CEO dying in a plane crash earlier this year.
The current CEO, Ken Chenault, is one of the longest tenured CEOs in the financial services industry at 16 years. And at 64 years old, his time could be limited as chief executive. ValueAct has had success with installing new CEOs; recall the fund’s involvement with getting Steve Ballmer ousted at Microsoft (NASDAQ: MSFT).
American Express is a quality brand with growth opportunities, including grabbing more of the ever-expanding electronic payments market share. Warren Buffett is still a believer in American Express’ potential, and the cheapness appears to have convinced ValueAct Capital.
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