Can American Express Earnings Keep Up With Visa and MasterCard?

American Express (AXP 2.56%) will release its quarterly report on Thursday. The renowned charge card company has earned its way back from the financial crisis with a solid recovery. Yet with AmEx's growth rates lagging behind those of larger card-network rivals MasterCard (MA 1.33%) and Visa (V 0.65%), the question for American Express earnings is whether the company can make the most of its favorable high-income demographic while at the same time appealing to a broader base of potential customers across the income spectrum.

American Express has worked on a strategy to take advantage of both of its strengths. Its continued emphasis on high-added-value card memberships and its proprietary membership-rewards program has helped it shore up its traditional customer base, while its Bluebird prepaid-card partnership with Wal-Mart has opened the door to new customers who haven't historically gotten much attention from the financial industry. 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.

American Express building in Italy. Source: Wikimedia Commons.

Stats on American Express

Source: Yahoo! Finance.

Can American Express earnings keep growing?
In recent months, analysts have gotten a lot more confident about their views on American Express earnings, boosting their fourth-quarter estimates by a penny per share and their full-year 2014 projections by a much more substantial $0.50 per share. The stock has stayed on the rise, soaring more than 20% since early October.

AmEx started out on the right foot with its third-quarter earnings report, which included revenue gains of 6% and net income jumping 9%. As a result of extensive stock buyback activity, American Express actually boosted its earnings per share by 15%. Even though returns on equity fell and expenses jumped 5%, CEO Ken Chenault emphasized the gains in credit quality that have helped AmEx recover so strongly.

Much of AmEx's success stems from the fact that it caters to the luxury market, which, in general, has held up better in recent years than more mainstream cardholders. AmEx leads Visa and MasterCard in terms of per-user spending, a key metric for any card network that generates revenue based on spending volume. Even though it maintains credit risk by issuing its own cards, American Express still gets more than half of its revenue from merchant fees, helping it participate in the profit potential from the spending activity of its customers.

One threat AmEx faces comes from the fact that it relies on its retail banking operations for some of its capital. Currently, AmEx pays relatively high interest rates in order to lure savers to keep their deposits with the bank. Yet if other banks start to compete more strongly with American Express, it could have difficulty holding onto those deposits, which offer capital at relatively low costs compared to other sources of funding.

Yet in terms of valuation, investors value Visa and MasterCard more highly than AmEx. That might well be due largely to AmEx's credit risk and the more impressive growth rates that MasterCard and Visa have produced lately, but it also has some investors nervous as the bull market approaches the end of its fifth year.

In the American Express earnings report, watch to see what impact continued reductions in share counts have on earnings per share. Given the stock's high share price, investors should worry that AmEx is buying high when it comes to its stock buybacks, especially if the recovery is starting to get long in the tooth.

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