Declining Credit Card Distribution Can Threaten American Express Upside

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American Express ( AXP ) 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 ( V ) and MasterCard ( MA ).

Our price estimate for American Express' stock is $47.16 , 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' stock .


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 US

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 2017.

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 Express' stock.

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 stock here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AXP , MA , V

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