In this article, we will take a look into American Express Co’s (NYSE:AXP) DCF analysis, a reliable and data-driven approach to estimating its intrinsic value. Instead of using future free cash flow as in the traditional DCF model, the GuruFocus DCF calculator uses EPS without NRI as the default for the DCF model based on research that shows that historically stock prices have been more correlated with earnings than free cash flow.
As of 2024-12-30, American Express Co’s intrinsic value as calculated by the Discounted Earnings model is $185.34. It’s currently trading at a price of $301.05. Therefore, the margin of safety based on the DCF model is -62.43%. The company is modestly overvalued.
The GuruFocus DCF calculator follows a two-stage model by default. This model consists of the Growth Stage and the Terminal Stage. In the growth stage, the company is experiencing faster growth, while in the terminal stage, a lower growth rate is applied because sustained rapid growth is not sustainable in the long run. American Express Co’s intrinsic value estimated by Discounted Earnings model are arrived at by following assumptions and steps.
|
Term |
Value |
Explanation |
|---|---|---|
|
$13.12 |
GuruFocus DCF calculator uses EPS without NRI as the default because historically stock prices are more correlated to earnings than free cash flow. |
|
|
Discount Rate |
11% |
An appropriate discount rate is typically the risk-free rate plus the risk premium of the stock market. GuruFocus uses the current 10-year Treasury Constant Maturity Rate of 4.6%, rounded up to the nearest whole number, which is 5%. A 6% risk premium is then added to arrive at the estimated discount rate. |
|
Growth Stage |
Growth rate (g1) = 8.10% Years of Growth Stage = 10 |
We choose the growth rate based on the availability, prioritizing the average EPS without NRI growth rate from the past 10, 5, or 3 years in that order, and then capping between 5% and 20% to maintain a fair and balanced estimate. The default growth period is set to 10 years. |
|
Terminal Stage |
Growth rate (g2) = 4% Years of Terminal Stage = 10 |
For the terminal stage, the eps will grow at 4% for 10 years. It is important to ensure that the terminal growth rate remains lower than the discount rate to facilitate convergence in the calculation. |
|
Growth Stage |
= |
EPS without NRI |
* |
[ (1 + g1) / (1 + d) |
* |
(1 + g1) ^ 2 / (1 + d) ^ 2 |
+ |
… |
+ |
(1 + g1) ^ 10 / (1 + d) ^ 10 ] |
||
|
= |
113.74 |
|||||||||||
|
Terminal Stage |
= |
EPS without NRI |
* |
(1 + g1) ^ 10 / (1 + d) ^ 10 |
* |
[ (1 + g2) / (1 + d) |
+ |
(1 + g2) ^ 2 / (1 + d) ^ 2 |
+ |
… |
+ |
(1 + g2) ^ 10 / (1 + d) ^ 10 ] |
|
= |
71.6 |
|||||||||||
|
Intrinsic Value: DCF (Earnings Based) |
= |
Growth Stage |
+ |
Terminal Stage |
= |
185.34 |
||||||
GuruFocus also provides the calculation using the traditional approach of free cash flow. Using trailing twelve month(ttm) Free Cash Flow per Share as a parameter, the DCF intrinsic value based on free cash flow is $303.31. This valuation indicates that the American Express Co is fair valued, accompanied by a margin of safety of 0.75%. You can always switch to using Free Cash Flow per Share to calculate the real DCF model on our DCF calculator page.
