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American Express Company Earnings: Can They Outgrow Visa and MasterCard?

On Wednesday, American Express (NYSE: AXP  ) will release its quarterly report, and investors have generally been impressed by the financial company's performance lately. Although the stock has pulled back from its all-time highs from last month, American Express is far more reasonably valued than rivals Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) . Even though many would argue that MasterCard and Visa have better growth prospects, American Express has plenty of opportunities to bolster its own business.

For decades, American Express has had the cachet of being the card that upper-class consumers used, with its original charge card not even allowing cardholders to carry a balance from month to month. American Express has evolved with the times, but it still retains both its own proprietary card network and its own credit-extending bank, aiming to profit both from merchant services and from cardholders paying finance charges. That gives it more risk than Visa and MasterCard, but it also presents the opportunity for greater rewards if American Express can successfully manage that risk. Let's take an early look at what's been happening with American Express over the past quarter and what we're likely to see in its report.

Stats on American Express

Analyst EPS Estimate

$1.30

Change From Year-Ago EPS

13%

Revenue Estimate

$8.35 billion

Change From Year-Ago Revenue

6%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can American Express's earnings grow faster?
In recent months, analysts have gotten a bit more optimistic about the company's earnings, raising their first-quarter estimates by a penny per share and their full-year 2014 projections by twice that. The stock has lost a bit of ground, though, falling 4% since early January.

American Express's fourth-quarter results give a good sign of the progress it has made since the financial crisis. Revenue rose 5% from the year-ago quarter, leading to a doubling of net income on a rise of almost 5 percentage points on its return on equity. Despite a sluggish holiday season that included substantial discounting among retailers, American Express' member card usage rose 8%, and the company's restructuring efforts have led to reduced overhead as well that has helped bolster its bottom line.

Much of American Express's success has come from its closed-loop model, in which it both issues its own cards and brings on merchant partners to accept them. That gives it a big advantage over Visa and MasterCard, in that American Express can control its proprietary information and use the resulting data analytics to improve the way it does business. The downside, though, is that MasterCard's and Visa's open-loop model gives them far more banking partners issuing cards, allowing them to make up for the fact that they don't collect any finance charges from cardholders.

Moreover, American Express has such high credit standards that even the worst conceivable economic downturn wouldn't hurt it nearly as much as its banking peers. In the Federal Reserve's most recent stress tests, American Express passed with flying colors, and under one particular stress scenario, its capital ratio would barely have budged. The emphasis on the high end also builds loyalty among its customer base, which gratefully pays membership fees in order to prove their worthiness to hold upper-tier American Express cards.

The biggest challenge to American Express might well come not from Visa and MasterCard but rather from up-and-coming electronic payment specialists. As younger people use electronic payment processing methods more extensively, American Express faces the challenge of avoiding getting a stodgy reputation among Millennials. It is working hard to hold its place in the mobile-payment space, but the company will have to convince younger customers of the value of its cards in order to sustain its competitive advantage in an increasingly crowded space.

In the American Express earnings report, watch to see how well the company does both in transaction volume and margin. As the economy roars ahead, credit worries have largely disappeared, and that could spell further growth for American Express well into the future.

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Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 15, 2014, at 3:23 PM, mikewatson021 wrote:

    The positive outlook is based on the expectation that American Express’s earnings will increase 12% in FY14. Shares are currently changing hands at 16.3

    times the company’s expected earnings for 2014. http://goo.gl/ZTUsmD

  • Report this Comment On April 15, 2014, at 6:16 PM, PhilipCohen wrote:

    "American Express Company Earnings: Can They Outgrow Visa and MasterCard?"

    Undoubtedly, to anyone with any understanding of the difference between Amex and Visa/MC, this would have to be the most absurd question ever put ...

  • Report this Comment On April 16, 2014, at 4:55 PM, mikewatson021 wrote:

    American Express, the financial and travel services company for consumer and business classes, expects to lend muscle in its travel business division by reinvesting some of the proceeds from the transaction. This will spur growth and revive the travel business, which has seen flat revenue growth over the last three years.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

11/26/2014 4:02 PM
AXP $91.45 Up +0.05 +0.05%
American Express CAPS Rating: ****
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V $257.26 Down +0.00 +0.00%
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