Buffett's Investment: American Express Company

You may remember that during the days of Buffett Limited Partnership (mid-1960s), Buffett had invested 40% of the partnership’s assets in American Express when the share price fell due to the Salad oil scandal. He rebought it 30 years later in the Berkshire Hathaway's portfolio. 

Consistent operating history

Although a bank, the banking operations contribute just 5% to the total sales of American Express. The rest is contributed by travelers’ cheque (72%) and financial planning, insurance and investment product division (22%). The travel business has always been there and has contributed significantly to the company’s growth and profitability.

Rationality

As a part of corporate restructuring, Harvey Golub (the incumbent CEO) started divesting businesses in order to unlock value for the first 3-4 years of his becoming the CEO. The financial targets of the company were set to grow 12-15% annually and to achieve 18-20% ROE; additionally, post the corporate restructuring, Golub announced a series of buybacks. 
By 1995, Berkshire owned 10% of the company.

Determining value

Since Golub had presented a plan to grow the company’s earnings by 12-15%, considering these assumptions in the discounted cash flow model and using 10% earnings growth for the next 10 years and 5% thereafter, and discounting the cash flows @8% (U.S. 30-year treasury), the intrinsic value of the company will be $100 per share. Buffett purchased it at a 70% discount.