How American Express Can Stand Out From Visa and MasterCard

American Express (NYSE: AXP  ) will release its quarterly report on Wednesday, and the stock has soared to all-time highs in recent months as shareholders have recognized the huge potential that its credit card business has. Rival Visa (NYSE: V  ) has the largest card network in the world, and MasterCard's (NYSE: MA  ) reach is also far greater than AmEx's. But American Express boasts highly profitable exposure to creditworthy cardholders, and in combination with a budding business aimed at rounding out its demographic exposure, AmEx could eventually give investors the best of both worlds while MasterCard and Visa have to make do with just one.

The financial business has come a long way since American Express first starting selling travelers' checks and offering membership to its original cardholders. Now, electronic payments dominate the industry, and AmEx has used its worldwide reputation for exclusivity to its long-term advantage. Yet as the pace of financial innovation accelerates, AmEx faces the challenge of making sure it doesn't fall behind. 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

$1.22

Change From Year-Ago EPS

11.9%

Revenue Estimate

$8.22 billion

Change From Year-Ago Revenue

4.6%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Where will American Express earnings end up this quarter?
Analysts have gotten more optimistic in recent months about American Express earnings, raising their third-quarter estimates by $0.02 per share and boosting their full-year 2013 and 2014 projections by four times that amount. The stock, though, has largely plateaued, with a drop of less than 1% since mid-July.

AmEx came into the quarter on a somewhat mixed note with its second-quarter earnings report. The company posted a record profit for the quarter as net income jumped about 5% year-over-year on a better than 3% rise in sales, but it still wasn't able to meet higher revenue-growth projections that investors had made. Although AmEx saw a 3% jump in domestic card-services income and a 17% rise in earnings from international card services, it posted falling returns on equity.

The bigger worry for AmEx came in July, when the European Commission released draft proposals on new regulations for the payment industry for the continent. AmEx asserted that the proposals were aimed more at Visa, MasterCard, and other companies that charge interchange fees. By contrast, it believes that its proprietary consumer and corporate card businesses wouldn't be covered by the EC's proposed price caps, and its relationships with merchants would largely go unregulated as well. Nevertheless, fears about regulation were enough to drive the stock lower temporarily.

Still, those fears haven't stopped AmEx from continuing its reorganization efforts. Last month, the company said it would sell half of its Global Business Travel division, creating a joint venture with an investor group. The card company has said that even though card transaction volume has risen in the division, business-travel services have suffered from companies that allow their employees to make online travel arrangements on their own.

Two other things have the potential to push AmEx higher than MasterCard and Visa. One is the big drop in delinquency rates that has improved the creditworthiness of AmEx's customer base. Visa and MasterCard don't care whether their customers pay card-issuer banks as the networks don't carry any credit risk, but AmEx's profits rise when its customer pay on time. Second, although MasterCard and Visa both offer prepaid-debit card products, AmEx's Bluebird partnership with Wal-Mart aims to offer a wider array of banking services that could give it far greater access to those who've previously avoided bank-like relationship.

In the American Express earnings report, watch to see how well Bluebird is doing and how much AmEx is able to reduce its credit-loss provisions. If conditions continue to improve, AmEx could see future earnings growth soar as its products get even more popular.

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