From Page 2 of AXP's "Notice of Annual Meeting of Shareholders To Be Held April 27, 1998":
"In connection with obtaining the approval of the Board of Governors of the Federal Reserve System to acquire up to 17% of the outstanding voting share of the Company, Berkshire and the Company have entered into an agreemenmt (effective for such time as Berkshire owns 10% or more of the Company's outstanding voting securities), and Berkshire has made commitments to the Board of Governors, designed to ensure that Berkshire's investment in the Company will at all time be passive. Pursuant to an additional agreement, so long as Berkshire owns 5% or more of the Company's voting securities and Harvey Golub is the Company's Chief Executive Officer, Berkshire and its subsidiaries will vote all Company common shares owned by them in accordance with the recommendations of the Board of Directors of the Company. Subject to certain exceptions, Berkshire and its subsidiaries will not sell Company common shares to any person who owns more than 5% of the Company's voting secruties or who seeks to change the control of the Company without the consent of the Company."
Page 2 of this notice also states that Buffett owned 49,456,900 AXP shares, or 10.6% of AXP, as of 12/31/97 (same as at 12/31/96). I think the above statement on Page 2 of the proxy statement is definitive proof that Buffett has already or plans to signficantly boost his AXP stake from 10.6% to 17%. I believe that if you want to purchase more than 15% of a publicly traded company, you must obtain permission from the Federal Reserve Board to do so -- and, apparently, Buffett has received this permission and has had to reveal his plans to buy more AXP to the entire world in the process. When Buffett is known to be buying something, it means that company is underpriced, so go buy some AXP on Monday. At 107 1/16, AXP is only up 19.958% this year (it closed 1997 at 89 1/4. My intrinsic value calculation also shows AXP is signficantly undervalued.
Intrinsic value = (net income + depreciation - capital expenditures) / (12/31/97 30-year bond rate + correction factor if historically low - numerator's growth grate)
So intrinsic value (at year-end 1996) = ($1,991 mil. + $187 mil. - $343 mil.) / (0.0592 + 0.01 correction - 0.05 growth rate)
= $95,572.92 mil. (year-end 1996)
Intrinsic value at year-end 1997 = $95,572.92 mil. * 1.05
= $100,351.6 mil. (year-end 1997)
#shares outstanding on 12/31/97: 466.417 mil.
"Instrinsic" share price on 12/31/97: $100,351.6 mil. / 466.417 mil. shares outstanding = $215
Wow, AXP's market share price on 12/31/97 was $89.25 but its intrinsic share price was $215! No wonder Buffett is planning to increase his AXP stake from 10.6% to a whopping 17%!!!!! And since we are more than halfway through 1998, AXP's intrinsic value has only increased but AXP is still selling at only about half its 1997 year-end intrinsic value ($107.0625 vs. $215).
�There�s no magic to evaluating any financial instrument...If every financial asset were valued properly, they would all sell at a price that reflected all of the cash that would be received from them FOREVER until Judgment Day, discounted back to the present at the same interest rate. There wouldn�t be a risk premium, because you�d know what coupons were printed on this �bond� between now and eternity. That method of valuation is exactly what should be used whether you�re in 1974 or you�re in 1998.�
-- Warren Buffett two months ago at the Univ. of Washington Business School
Like Coke and Gillette, American Express is the kind of company whose earnings are as regular and predictable as a perpetuity bond. Therefore, you can use the perpetuity formula to calculate the intrinsic value of AmEx, which is exactly what I did in my previous post.
The perpetuity formula (with a coupon that grows at the rate of g) is:
PV (perpetuity) = C / (r - g)
If you look at AmEx's "owner earnings" ("C" in the above formula) for the past 10 years, you will notice that C has been growing at MORE than 5% a year for the past 10 years. Thus, when I used 5% as g in my previous post, I was using a CONSERVATIVE growth estimate for AmEx -- so, if anything, AmEx's intrinsic share price is probably HIGHER than $215, but I use an intentionally low g just to stay on the safe side.