Amid the slow pace of economic recovery in the U.S.,
American Express
(
AXP
) still managed to close 2010 with revenues rising 13.4% to $27.8
billion. The total transaction volume on American Express-issued
cards, both charge cards and credit cards issued in the U.S. and
internationally and to corporations across the globe grew inline
with the historical growth rates of over 13%. However, these gains
were largely due to an improving macroeconomic environment which
was a tide that lifted all boats. In order to give us more
confidence on American Express' ability to keep competitors Visa (
V
), MasterCard (
MA
) and Capital One (
COF
), we would like to see American Express grow its customer
base.
A Quick Recap
American Express's 2010 revenues grew 13% from $24.5 billion in
2009. American Express did not however push the number of its
cards-in-use, which remained more or less flat at 2009 levels.
American Express issued card-in-use in U.S. grew by 0.7% to 29.7
million and those issued outside the U.S. declined by 1% to 10.4
million and corporate cards remained flat at 7.1 million.
This conservatism in card issuance helped to cut losses to $1.6
billion in 2010 from over $3.8 billion in 2009 on U.S. cards and to
$390 million in 2010 from $1.2 billion in 2009 on cards issued
outside US. While pushing cards-in-use numbers would have led to a
rise in losses, we believe it would have been more than compensated
by an increase in revenues from transaction fee, annual card
membership fee and interest income on credit card debt. Moreover,
as the economy recovers, this would have allowed American Express
to expand its footprint, or market share.
Headwinds Looking Ahead
1) Impact of Credit Card Accountability Responsibility and
Disclosure (
CARD
) Act
Passed into law by the Obama Administration, this law ensures
greater disclosure to cardmembers among other things. In
particular, the card company must notify card holders 45 days prior
to changes in interest rates. As a result, the cardmembers can
schedule their payments accordingly leading to either (i) sooner
settlement of loans in case of an impending rise in rates, or (ii)
a delayed settlement of loans in case of a decline in interest
rates. In both cases, a card company could lose from greater
transparency.
2) A Decline in Transaction Fee
American Express leverages its affluent card member base to
charge the retailer a higher commission on the transactions.
American Express's transaction fee has faced much resentment
amongst the sellers, which has restricted the acceptance of
American Express cards compared to Visa and MasterCard. The
transaction fee on American Express cards has reduced from over
2.23% in 2005 to current levels of around 2% and given the
increasingly competitive landscape, the trend is expected to
continue well into the future.
You can drag the graph below to see the impact on stock
price.
You can see a detailed analysis of our
$49.60 Trefis price estimate of American Express'
stock here
.