American Express Wants Into Your Wallet

On Wednesday, American Express (AXP 5.56%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever surprises inevitably arise. That way, you'll be less likely to make an uninformed, knee-jerk decision.

AmEx has spent decades building its reputation as a premier financial company, offering travel services and its namesake membership-based charge card. Earning a spot within the Dow Jones Industrial Average (^DJI 0.68%) was a natural goal for the high-prestige card company, but AmEx now sees its future moving in a somewhat different direction. 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 quarterly report.

Stats on American Express

Source: Yahoo! Finance.

Did AmEx leave home without strong earnings this quarter?
Analysts have had mixed views on AmEx's earnings over the past few months. They've raised their earnings-per-share estimates for the just-finished quarter by a penny, but they've cut a penny off their earnings calls for the full 2013 year. The stock, though, has done reasonably well, rising nearly 10% since early January.

Most people don't think of American Express as a bank, but it was subject to the same stress tests that Wall Street's finest had to endure in March. AmEx's marks from the Federal Reserve were outstanding, easily topping most of its peers. In fact, AmEx was one of the few companies that actually posted a hypothetical pre-tax profit even under the stress-test scenario -- something most banks could only dream of. As a result, AmEx chose to boost its dividend by 15% and implement a share buyback of $4.2 billion.

With the stress tests behind it, AmEx can focus squarely on its future with a strategy of expanding its business beyond the high-income niche to target customers of all income levels. In particular, as consumers have moved away from credit cards and toward debit cards, Visa (V -0.55%) and MasterCard (MA 0.17%) have made great progress in addressing the higher demand for debit transactions. Until recently, AmEx has been behind the curve with debit cards.

But with its FDIC-insured Bluebird prepaid debit card, AmEx is looking at an entirely different demographic, giving it far greater growth potential than its card-network rivals. Visa, by contrast, trades at nearly three times the earnings multiple that AmEx fetches, based largely on its efforts in the mobile-payment space to defend its dominant position in the industry. MasterCard also trades at a premium valuation based on assumptions of faster growth coming from its combination of mobile-payment and debit-card business. If AmEx can convince investors that its growth is for real, then there's no reason the card company can't earn equivalent multiples to those of Visa and MasterCard.

In AmEx's earnings report, focus closely on any information the company gives you on its Bluebird card. If American Express can cash in on a brand-new set of underserved customers, then it could spell a new and lucrative growth phase for the company.

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