) is a leading financial services company offering credit and
charge card products along with travel-related services to
consumers and businesses across the globe. The company is the third
largest issuer of credit cards in the US, after Visa (
) and MasterCard (
Our price estimate for American Express' stock is
, about 10% ahead of market price.
American Express predominantly makes money by offering credit
and charge cards to consumers, earning a percentage commission from
the merchant on every transaction. By our estimates, card
transaction and execution fees constitute close to three-fourths of
our $47.16 price estimate for American Express'
American Express also earns net interest income (net of the
interest expense incurred on the funds raised for extending the
aforementioned credit) on outstanding credit card balances, which
constitutes about 6% of our price estimate.
Number of Credit Cards in Use has Declined in the
American Express' business largely depends on the number of
cards in use, as this can often drive the number and aggregate size
of transactions on which it earns a commission. Macroeconomic
conditions such as employment levels and inflation rates (which
impact the disposable income levels) can also influence average
outstanding credit card balances.
The number of credit cards in use in the US has reportedly
declined from over 70 million to roughly 62 million over the past
year. We believe that most of this decline is likely not due to
card cancellations, as most banks had already written-off bad
credit card debts during the recessionary period between 2008 and
2009. We note that such write-offs were potentially less of a
concern for America Express, given its more affluent customer base
and conservatism in issuing cards (consistently resulting in the
industry's lowest charge-off rates).
However, voluntary aversion to using credit cards could still
pose a serious concern for American Express. Here we explore
how the decline in the number of credit cards in use could
potentially affect American Express' stock value.
Declining Credit Cards in Use Could Create Downside to
American Express' Stock Value
We currently forecast the number of American Express cards in
use in the US will increase from nearly 30 million in 2009 to 34
million by 2012, eventually reaching 44 million by the end of
If the recent decline in the number of credit cards in use were
caused by the slow pace of economic recovery in the US and caution
among consumers not willing to take further credit card debt amidst
reduced disposable income levels and unemployment rates hovering
around 9.8%, we can expect a short-term decline in the number of
credit cards in use. If this total were to slide towards 25 million
by 2012 (5 million below current estimated levels), it could
generate a 13% downside to our $47.16 price estimate, leaving our
number below market price.
Our greater concern, however, is that the recent decline in US
credit cards in use might not only have been caused by the
recessionary macroeconomic outlook. Another key factor could be an
increased consumer preference for debit cards, which let consumers
enjoy similar loyalty and reward programs in addition to the
convenience of making card payments without incurring interest
expense on the outstanding balance. If this were indeed the case,
it could limit the upside in total credit cards even beyond 2012.
If this metric were to increase modestly at around 2% each year
beyond 2012 (to 28 million by the end of our forecast period), it
could create an 18% downside to our price estimate for American
Drag the trend-line in the chart above to see the impact of
various American Express-issued credit cards in use scenarios on
American Express' stock value.
You can see our detailed
$47.16 Trefis price estimate for American Express