By Adil Yousuf
2013 is shaping up to be a stellar year for American Express (AXP). Shares have rallied more than 20% this year, surpassing the broader market's impressive performance. Despite the run up, the question remains: is American Express still a good potential buy?
We'll look to address the above question by analysing:
- Characteristics and Product offerings that differentiate American Express from its peers.
- Company Fundamentals.
- Steps the Company is taking to expand its user base.
American Express is a highly recognized brand in the payment business. The company differentiates itself from its peers by catering to a relatively affluent customer base — by focusing on attracting high-spending, high-credit consumers and businesses with its rewards programs and benefits, the firm has created a profitable niche in its flagship charge card products.
Interestingly, the higher spending demographic enables American Express to charge a higher interchange fee (2% vs. 1.25% on average) to merchants relative to Visa (V) or MasterCard (MA).
Through its charge cards, American Express caters to higher credit-worthy members and processes the highest dollar volumes relative to Visa and MasterCard.
As a credit card issuer, American Express's performance is dependent on the overall state of the economy. American Express drives more than 70% of its revenue from the US — with US consumers growing tentatively optimistic 1, American Express is poised to capitalize on the bullish economy.
The Company reported strong earnings for Q1 2013 as consumers increased their spending. Net income of $1.15 per share exceeded analyst estimates by 3 cents. Net revenue for the quarter also increased 3.9%. Additionally, global card spending rose by 6.3% — Customers spent an average of $3,905 in the quarter, a 3.5% increase from a year earlier.
Market IQ proprietary Fundamental metrics give American Express a Neutral - rating. Market IQ characterizes American Express as a good Value, but low Quality stock (see below).
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Market IQ's Valuation metrics suggest that American Express is cheaper than 67% of its peers. Among credit card companies, American Express offers a modest valuation and shows a lot of potential over competitors who have priced in future earnings and revenue much more strongly (see below).
American Express's fundamental stock Quality is relatively lower compared to Visa (V), MasterCard (MA), Discover Financial Services(DFS), and Capital One Financial Corp. (COF). This is mainly due to relatively weak revenue growth and weak Financial standing relative to its peer group. Note: Market IQ quantifies Quality by evaluating company's Profitability, Estimate Momentum and Financial Strength.
- Over the trailing 12 months, revenue growth has underperformed relative to the industry average — 4.73% vs. 18.5%.
- American Express has Equity to Debt ratio of 0.14, which is lower than the industry average of 1.98, indicating weak Financial Strength when compared to its peers.
The company is in the midst of cutting approximately 5,400 jobs this year to contain expenses. Additionally, to address weak revenue growth. American Express is rolling out products to acquire customers beyond their affluent user base. The deal with Wal-Mart (WMT)2 for distribution of prepaid American Express cards should provide the company with access to their non-core demographic. However, the bigger question is: will American Express be able to maintain its high standard of customer satisfaction with the less profitable customers? Different call centres for different card members, maybe?
In the last few years, American Express has expanded its reach by offering traditional credit cards and other financial products that are more focused on generating a higher volume of transactions. While such offerings are dilutive to the firm's credit health, they add significant merchant fees. With a spend-centric model, the firm is better positioned for the next economic hiccup relative to its peers In the meantime, partnerships with more conventional banks should add to American Express's fee generation abilities without levering up its balance sheet.
Outside the US, American Express has taken a step away from its closed loop model (where it issues its own credit cards and acts as the acquirer for merchants accepting the card). In 2012, over 80% of American Express branded cards issued outside the US were issued through third party financial institutions, in agreement with the company's global network services division. Transaction fees earned through third party issuers have increased by 15%, higher than 9% for propriety cards in the US Revenues earned through third party issuers also accounted for 15% of the company's gross revenues in 2012 3, indicating the importance of this business.
American Express continues to deliver solid profit with efficient management. The firm's unique market positioning has kept its niche well-protected, even as competitors try to lure American Express card members to rival brands. With its loyal base of affluent customers, American Express is poised to perform well over the long run.
1Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment rose to 83.7 from 76.4 in April — the highest level since July 2007. Economists surveyed by Bloomberg had expected a level of 78.
3Statistics are taken from a report published by TREFIS.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.