American Express

We didn't have Facebook, yada, yada. And yet, if you bought the Nasdaq in '99, it went down 80 percent before that all came to fruition. That's not going to happen with AI. But it could rhyme – AI could rhyme with the Internet as we go through all this capital spending we need to do, the payoff while it's incrementally coming in by the day, the big payoff might be four to five years from now. So AI might be a little overhyped now but under-hyped long term.QUICK: You said you're not like Warren Buffett, but what you just did with Nvidia sounds an awful lot like what he did with Apple. He pared his position in Apple by 13 percent, and they went on to say it's a better company than Coca-Cola or American Express or any of the other companies that they have in their portfolio, and he thinks Tim Cook is great.DRUCKENMILLER: Yeah. Well, I will be very surprised if I don't own Nvidia on and off next 10 years.KERNEN: You're so bullish on AI. Andrew, you did a great interview with Perplexity and I think that -- that's where you decided might be a place that you want to be.ANDREW ROSS SORKIN: Yeah.DRUCKENMILLER: I love perplexity. Again a funny story -- my young partner, the one who has basically been behind all our AI play with his -- with his staff. He told me, I don't know, in January, that all the kids on the West Coast weren't using ChatGPT or Google anymore. They were using this thing called Perplexity AI. So I, of course, tried it out and it was just unbelievable.

Chairman and CEO Stephen Squeri opened the Q4 2023 review by reporting full-year revenues net of interest expense of $60.5 billion, up fourteen percent year over year, and earnings per share of $10.60. Management told the call that billed business grew ten percent on a currency-neutral basis, with the premium-cohort Cards - the Platinum, the Gold and the Business Platinum - growing billings at high-single-digit to low-double-digit rates despite the macroeconomic softness that emerged in the back half of the year. CFO Jeff Campbell walked analysts through the credit metrics, acknowledging that write-offs on the Card Member loans portfolio had normalised upward from the unsustainably low levels of 2021 and 2022 to a level roughly in line with the 2019 baseline. He flagged that the Company had built approximately $1.2 billion of incremental reserves during the year under the CECL regime, but that the underlying delinquency drift had been concentrated in the small-business and consumer credit-card segments rather than in the premium proprietary franchise. On the Q&A, analysts pressed on whether the credit normalisation implied that the premium customer was finally showing signs of stress. Squeri responded that the high-spend proprietary Cards had continued to grow billings faster than the Company average, that the FICO profile of the new accounts being acquired was actually higher than the existing book and that the underwriting discipline installed after the 2008 cycle had held up through the rate-shock environment. He also reiterated the long-term revenue growth algorithm of ten percent plus and the mid-teens earnings growth algorithm, anchored on the durability of the network and the premium proprietary franchise. The call closed with management introducing 2024 guidance of earnings per share between $12.80 and $13.80, framed as the midpoint of the long-term algorithm, and signalling that the Company intended to return roughly 100 percent of operating free cash flow to shareholders through the cycle.

Chenault's successor, Stephen Squeri, opened the Q2 2020 review by reporting that second-quarter revenues net of interest expense had fallen nearly thirty percent year over year, reflecting the collapse of travel-and-entertainment spend that historically accounted for a disproportionate share of Amex billings. Management told the call that the small-business and consumer services segments had partially offset the T&E collapse, and that the Company had moved aggressively during the quarter to defer marketing, reduce operating expenses and tighten underwriting on new accounts and on existing credit lines. CFO Jeff Campbell walked analysts through the $1.5 billion pre-tax credit provision taken during the quarter, of which approximately $1.2 billion represented reserve builds under the new CECL accounting regime. He flagged that the Company had suspended share repurchases during the quarter, retained capital to absorb the forward expected losses and continued to pay the common dividend, but would not restart buybacks until visibility on credit losses and T&E recovery improved. On the Q&A, analysts pressed on whether the COVID shock would structurally compress the T&E franchise in the way the post-9/11 shock had compressed corporate travel. Squeri argued that the early data from the May and June reopenings, especially the small-business and consumer services segments, suggested a faster recovery path than the post-9/11 trajectory and that the Company's premium Card Member cohort was holding spending better than the broader consumer. He also highlighted that the underlying merchant network had not contracted during the crisis, with the acceptance footprint expanding on net. The call closed with management declining to provide formal full-year guidance given the unresolved visibility on the pandemic path, but committing to a near-term priority of protecting the dividend, preserving capital and protecting the marketing investment behind the premium brand once the cycle turned.

Chenault opened the Q4 2015 review by reporting full-year revenues net of interest expense of $32.7 billion and earnings per share of $5.64, both up on a constant-currency basis. Management told the call that the proprietary consumer and small-business network had grown both billings and Card Member loans in the mid-teens year over year, and that the renewal of the Costco co-brand portfolio to Citigroup and Visa had been the most consequential strategic decision of the year, framed as a willingness to walk away from a portfolio whose unit economics did not clear the Company's return-on-equity hurdles. CFO Jeff Campbell walked analysts through the $400 million pre-tax restructuring charge taken in the quarter, which had accelerated the Company's transition to digital-first service and marketing. He flagged that more than seventy percent of new accounts were being acquired through digital channels, that mobile was now the largest customer-service channel and that the underlying technology cost-to-serve would compress materially over the following two years. On the Q&A, analysts pressed on whether the Costco decision would produce a multi-year overhang on revenue growth. Chenault defended the decision, arguing that the renewal terms being offered by Costco would have destroyed the marginal economics of the portfolio and that the underlying premium proprietary franchise was growing fast enough to absorb the volume loss. He also signalled that the loss of the JetBlue co-brand to Barclays reflected similar discipline around the minimum acceptable return on the deployed capital in co-brand. The call closed with management reaffirming the long-term algorithm of mid-teens earnings growth, anchored on the durability of the premium proprietary spend franchise, and signalling that 2016 would be a transition year affected by the Costco exit before the proprietary growth re-accelerated in 2017.

Chairman and CEO Ken Chenault opened the Q4 2008 review by acknowledging that the Company had entered the worst consumer credit cycle since the early 1990s recession and that American Express had moved during the fourth quarter to materially tighten underwriting, reduce credit lines and reprice risk where the data warranted. Management reported that reported earnings per share for the year had fallen by more than thirty percent, with most of the deterioration concentrated in the Card Member loans segment, where net write-offs had moved above eight percent on a managed basis. CFO Gary Crittenden walked analysts through the $1.4 billion pre-tax charge taken during the fourth quarter, comprising roughly $800 million of incremental loan-loss reserves, $400 million of severance and restructuring and the balance of writedowns tied to the investment portfolio. He flagged that the restructuring would remove more than $1.8 billion of operating expense from the run-rate by 2010 and that the Company had secured a one-year equity injection of approximately $3.4 billion from the U.S. Treasury's Capital Purchase Program to bridge the cycle. On the Q&A, an analyst asked whether the high-end spending customer had actually held up better than the broader consumer. Chenault responded that the high-spend Card Member cohort had seen far less delinquency drift than the broader book, that the proprietary spend data had allowed Amex to take earlier and more targeted underwriting actions than the broad bank-card issuers and that the brand's premium positioning was itself a structural advantage through a downturn, even though it could not fully insulate the Company from a synchronised consumer recession. The call closed with management signalling that 2009 would be a transition year of flat billings, sharply lower credit metrics and operating expense reduction, and that the Company's long-term algorithm of mid-teens return on equity and high-single-digit earnings growth would be reaffirmed once the cycle turned.

In 1954, MIT (now part of Massachusetts Financial Services, or MFS) lost its crown to Investors Diversified Services, (IDS) which became part of American Express, and then spun off as Ameriprise Funds, and just recently (through a merger), Columbia Funds. (No, I’m unable to rationalize how this kind of trafficking in mutual fund advisory fee contracts advances the interests of shareholders of the mutual funds involved.) IDS also wore the crown for a long time—24 years—through 1978, reaching a peak market share of 14 percent of industry assets. I’m confident that this audience knows who ultimately took that crown away from IDS.* Fidelity’s stunning ascent to industry leadership began in 1979, and it would hold that lead through 2005, a remarkable 26-year record of durability, with its market share peaking at a 13 percent share of industry assets. (You may be puzzled, as am I, why it took the financial press another four years to recognize Vanguard as Fidelity’s successor. Perhaps this oversight is explained by the fact that the firms were neck-and-neck in 2006- 07-08, with Vanguard sometimes ahead by as little as $3 billion, rounding error at these trillion-dollar levels.) In any event, Vanguard now firmly holds the undisputed crown of industry leadership. Our 13 percent market share is rapidly approaching the share level of the previous title-holders. The Vanguard-Fidelity rivalry, however, is rather complex. While our $1.468 trillion asset total exceeds Fidelity’s $1.

” I’d be remiss if I didn’t point out that we had several mistakes in 2001. Buffett has eloquently said that his biggest mistakes are mistakes of omission. I was trying to buy some stocks too cheaply and the trades never executed. Tricon Global (YUM) is one that I’ll remember for some time to come. Pepsi spun off Taco Bell, KFC and Pizza Hut to shareholders in a separate company called Tricon. Normally, I’m always been bearish on QSRs. However, I read an extensive piece on Outstanding Investor Digest and loved the business after I really understood it. It was at about $27/share at the time. By the time I finished my research and was all excited the stock was at about $33/share. I decided that I’d pay no more than $32 for it and placed limit orders. Tricon was an exceptionally cheap and fast growing company at $32/share. The stock came as low as $32.25, but I never changed the limit orders. Its now north of $50 and we don’t own a single share. I blew it with Tricon. American Express is another one where, when it fell to the $26 range after 9/11, I considered it a steal. I was able to get some for PIFI, but did not have cash available when it hit $26 in PIF2. Later when I had the cash, I had the opportunity to get some at $27, but I stuck to the $26 price. At $26 there was a very good chance of a 100% return in 24 month. At $27-28, I thought the return might be around 80-90% - which is still very very good for a solid blue chip like AXP.

Companies whose prospects are impaired only in the short term, but have minimal impact long term (e.g. American Express). It’s clear that American Express’s near term earnings will take a hit as travel slows down. American Express earnings took a hit during the Gulf War as well. But what was the impact on American Express’s intrinsic value in 2001 related to the Korean War, Cuban Missile Crisis, the Kennedy assassination, the Vietnam War and the Gulf War? The answer is zero. I suspect that the impact on them 2-3 years from now will again be close to zero. I’m ploughing through companies in this category that are now “on clearance sale” to see if they fit our investment criteria.3

from them in the 1950s and 60s Buffett Partnerships. Buffett continues to invest in workouts for his own account as well as Berkshire Hathaway. Another terms for workouts would be Arbitrage or simply “Special Situations” Buffett does two types of investing. One is buying great companies at compelling valuations and holding them for a long time (Coca Cola, American Express etc.) The other is workout investing. He has made a lot of money in his career for these workouts. Workouts typically offer modest returns, but virtually no risk. Let me give you some examples: Company A is publicly traded and its stock is at $30/share. Company A announces that it has reached an agreement to be sold to Company B in an all-cash transaction for $35/share. They announce that the both the boards have approved the transaction and recommended that shareholders approve it as well. A month later, the shareholders have approved the merger and the deal is expected to close in 30-45 days. Company A’s stock is trading in a range of $34-$34.50/share. The NASDAQ drops 10% a month before the merger and the stock drops to $33.50/share. If one bought the stock at $33.50 and got $35 a month later, it’s a 53.73% annualized rate of return with virtually no risk! This is known as “Merger Arbitrage”. Usually spreads on announced cash mergers are slim, but occasionally these spreads widen. They are sometimes quite wide if the companies are small cap as liquidity issues keep big players out.

If the answer is no, the business is simply skipped over. 2. Is this a great and predictable business? The definition of a great business would mean a business that has some of the following characteristics: • Recurring Revenue Streams (e.g. GEICO) • Ability to raise prices ahead of inflation (e.g. The Washington Post) • Some sort of Monopoly or Oligopy type market positioning (e.g. American Express) • Strong franchise/brand that gives it insulation from most competitors (e.g. Coca Cola) Most businesses do not have ANY of the above characteristics and some may just have one of the above. A business that has more than one of the above characteristics is, by definition, rare. If I find a great business then I ask the third, and more difficult, question: 3. Is it on sale at a price well below its Intrinsic Value(IV)?3

The combination of a great business and it being on sale is, by definition, an anomaly. I look for these anomalies. When they occur, after rigorous analysis, I’ll either take a pass or backup the truck. There are two types of great business that are of interest to the fund: 1. Great, compelling companies trading at very low valuations relative to their expected value in a private sale. These companies may have little to no annual growth, but tend to have a solid cash flow engines that are highly predictable and are trading at very low multiples to earnings, cash flow and/or other metrics of value. 2. Growth at Reasonable Price (GARP) Companies. These companies, in high- growth markets, have shown a history of growing fast and are expected to continue to do so. I usually prefer GARP companies to straight value companies. I think the best returns will come from great, high growth companies that are available well below IV. I believe most of Buffett’s success has come from GARP-type businesses (Coca Cola, American Express, GEICO, The Washington Post etc.) So value businesses remain in the portfolio till either: 1. They reach IV and are sold. 2. A better value business comes along. 3. A better GARP business comes along. GARP businesses remain in the portfolio till: 1. They go well beyond IV. I hate to sell a good GARP business unless its well beyond IV. 2. A better GARP business comes along.

Buffett argued that broad diversification is a strategy for the investor who does not understand businesses, and that the informed investor is better served by concentration. He wrote that if an investor genuinely understands a small number of companies, the risk-reward of owning those companies in size is superior to diluting conviction across many names whose economics are less clear.

On concentration as the corollary of genuine understanding.

Chairman Harvey Golub's third-quarter 1991 review came at the moment the Salomon Brothers Treasury-auction scandal had metastasised into a broader confidence crisis across the brokerage arm American Express still controlled through its Shearson Lehman Holdings subsidiary. Management told the call that the Company's core Travel Related Services franchise had continued to grow billings business across both the green-card and the Optima revolving credit product, but that earnings would be obscured in the near term by the additional capital and reserve actions required at Shearson. CFO Michael Mortella walked analysts through the planned $1.4 billion charge to restructure the brokerage arm and to recapitalise the leasing portfolio that had been the source of recurring credit losses. He framed the actions as a deliberate decision to surface the worst-case loss expectations in a single quarter, so that the underlying TRS franchise could be valued on its own merits going forward rather than against the dragging uncertainty of the brokerage book. On the Q&A, analysts pressed on whether the Salomon crisis and Shearson losses would force the Company to issue equity to defend its capital ratios. Golub responded that the dividend on the common stock would be maintained, that the Company would continue to buy in shares opportunistically and that the charge had been sized to remove the optionality of further equity issuance from the brokerage subsidiary. He argued that the Optima revolving product was the more important strategic variable for the long-term value of the Company and would receive disproportionate investment in 1992. The call closed with management declining to provide formal quarterly guidance but committing to a multi-year trajectory of restoring return on equity to the mid-to-high teens, anchored on the durability of the card-fee and discount-revenue economics that had defined the Company's brand strength for a century.

Buffett wrote that Berkshire's policy was to hold a small set of businesses it understood and admired, and that the test for inclusion was not whether a position had risen in price but whether the underlying business still met the original standard. He compared the portfolio to a group of permanent holdings — the kind of business one would be content to own if the stock market closed for a decade — and warned that the temptation to trade in and out of such businesses was the chief way owners harm themselves.

On the 'permanent holdings' framing and the futility of trading wonderful businesses.

GEICO's problems at that time put it in a position analogous to that of American Express in 1964 following the salad oil scandal. Both were one-of-a-kind companies, temporarily reeling from the effects of a fiscal blow that did not destroy their exceptional underlying economics. The GEICO and American Express situations, extraordinary business franchises with a localized excisable cancer (needing, to be sure, a skilled surgeon), should be distinguished from the true 'turnaround' situation in which the managers expect - and need - to pull off a corporate Pygmalion.