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

On Wednesday, American Express (AXP 0.07%) 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 (V 0.33%) and MasterCard (MA -0.07%). 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

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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