Amex Deserves Plenty Of Credit

7/9/2012


  Recent Price
$59
  Dividend
$0.80
  Yield
1.4%
  P/E Ratio
14
  Shares (millions)
1,166
  52-Week Price Range
$61.42 - $41.30

American Express ($59; AXP) operates the world's third-largest credit-card network, behind MasterCard ($440; MA) and Visa ($127; V). Like those companies, American Express generates substantial revenue from interchange fees charged to merchants for credit-card usage. Unlike those companies, American Express also issues credit cards, gleaning revenue from annual memberships and interest on outstanding balances.

Once viewed as a favored form of payment for wealthy vacationers, American Express has sought to widen its appeal over the past 20 years. As a result, customers more frequently use Amex cards for daily spending. In 1990, entertainment and travel accounted for 64% of the company's U.S. billings; such charges now provide just 28%.

While Amex aims to be a premium brand for status-seeking shoppers, its stock offers a reasonable valuation for thrifty investors. Shares fetch less than 14 times trailing earnings, a 35% discount to the three-year average. Operating profit margins have expanded in three straight years, a trend extending into the March quarter. Sales grew 8% in the 12 months ended March, while free cash flow jumped 56% to $11.09 billion. American Express, added to the Buy and Long-Term Buy lists in the June 25 issue, is now being added to the Focus List.

Business breakdown

Amex operates a closed-loop network, overseeing both ends of transactions between shoppers and merchants. That allows Amex to analyze spending trends and help retailers design targeted marketing efforts and special offers.

In addition to its own credit cards, Amex allows third-party cards on its global network. Spending on cards issued through third parties has climbed at a 25% annualized rate since 1999. Amex takes a smaller slice of revenue for each dollar spent on third-party cards, but it also bears only a fraction of the operating costs. Amex says it can profitably expand this business with minimal capital investment.

U.S. and international consumer and small-business cards provided 68% of revenue net of interest expense last year. Corporate payment and travel-related services (15% of revenue) and the payments network (16%) round out Amex's businesses. The company has nearly 99 million cards outstanding, about 48% outside of the U.S. Amex says cardmember volumes are rising in both the U.S. and overseas.

Europe generates about 12% of Amex's billed business. Instability in Europe's banking system threatens the confidence of consumers and businesses alike. Euro zone leaders have stepped up efforts to stabilize the financial system, but Amex will be hurt if the debt crisis triggers a surge in defaults.

Conclusion

The consensus projects Amex will earn $4.33 per share in 2012, up 16%, on sales growth of 7%. Management has proven itself capable of managing expectations, having topped consensus profit estimates by at least 4% in 11 straight quarters. An annual report for American Express Co. is available at World Financial Center, 200 Vesey St, New York, NY, 10285; (212) 640−2000; ir.americanexpress.com.

AMERICAN EXPRESS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '12
1.07
vs.
0.97
+ 7%
59.26
-
47.40
15 - 12
Dec '11
1.01
vs.
0.88
+ 6%
52.35
-
41.30
13 - 10
Sep '11
1.03
vs.
0.90
+ 7%
53.80
-
42.03
14 - 11
Jun '11
1.07
vs.
0.84
+ 11%
51.97
-
45.10
14 - 13
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
32.28
4.09
0.72
53.80
-
41.30
13 - 10
2010
30.24
3.35
0.72
49.19
-
36.60
15 - 11
2009
26.52
1.54
0.72
42.25
-
9.71
27 - 6
2008
31.92
2.47
0.72
52.63
-
16.55
21 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
83
89
64
71
49
24
73

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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