rid of Borders and a stake in Office Max, the company is now focused.
I also like John Deere (NYSE: DE), which makes tractors, combines and lawn-mowers. They are still trading on significant discounts to the market, however, despite the fact that their profitability is tremendous. They’re getting almost 50% of their business from the overseas markets. The company’s P/E is about 13 times 1997 projected earnings. We also like to look at companies who are trading at a discount to their growth rate. I would say they traded typically, in today’s environment, at about 75% of the market multiple.
Finally, we like both Lehman Brothers (NYSE: LEH) and American Express (NYSE: AXP), which spun them off not too long ago. American Express has a unique franchise in their card and travelers’ checks, which is a boon as we move to a more global economy. Amex has also begun to pick up some of the credit card marketshare they lost to Visa and MasterCard. They have had some missteps, on the credit card side with Optima, but that is coming together for them, and we think that they will continue to be the dominant player in that market.
Also, American Express Financial Advisors, formally known as IDS, is growing rapidly and they are taking advantage of the growth in the baby boomers market, 401(k) plans and individuals focusing more on savings. Also, there have been rumors that Citicorp and others are looking at purchasing them and they have had discussions.
Lehman Brothers is a premier bond firm on Wall Street. It’s small enough for the major banks to absorb them without running into antitrust issues. Wall Street tends to value stocks like this on book value, and Lehman currently trades at 1.3 times book. By comparison, Merrill Lynch is about 2.6 times the book. People think that this company will be taken out at two times. We don’t believe it will survive in its current form. We think that they will be bought out some time this year.
We think American Express is going to renew its growth rate, in the 15% area, over the next five years, for the reasons that I’ve talked about. Yes, we think it’s probably fairly valued on the near term–it has gone up 30% this year–but we think that its earnings growth is going to start to increase fairly rapidly and that, as a result, whether it be an expansion of the multiple or earnings growth, the company still has some very good upside.
EDWARDS: One of the names I favor is First Data Corp. (NYSE: FDC). We think the stock is going to benefit from the outsourcing trends and also the way society is depending more and more on electronic transactions. It’s a stock that has grown at about 18% over the last five years, versus a market that has grown at about 15%. Its P/E is 31, but at this level it looks like a good value. For the last 12 months, we have seen about a