In the payments solutions space, MasterCard (MA +0.77%) and Visa (V +0.58%) often grab most of the spotlight since they are the fastest growing and have offered investors the largest returns in recent years. The third major credit card giant, American Express (AXP 0.50%), seems to get overlooked by many investors as a result.
While the company offers slower growth compared to MasterCard and Visa, American Express excels in other areas and in many ways is the safer growth alternative. As such, American Express remains an excellent choice for investors seeking to capitalize on the strong industry trends while avoiding much of the risk.
Sizing up the giants
The following is a breakdown of the projected growth rates and valuation levels of all three credit card companies, as well as several important fundamental metrics:
|
Company |
American Express |
MasterCard |
Visa |
|---|---|---|---|
|
2014 Revenue Growth |
5.2% |
12.1% |
10.2% |
|
2014 EPS Growth |
10% |
17.5% |
17% |
|
Trailing P/E |
19.83 |
29.84 |
26.63 |
|
Forward P/E |
15.5 |
24.32 |
19.47 |
|
Market Cap |
90.05 billion |
90.82 billion |
128.96 billion |
|
Revenue 2014 |
34.74 billion |
9.37 billion |
12.98 billion |
|
Dividend/Yield |
0.92/1.1% |
2.40/0.3% |
1.60/0.8% |
As expected, American Express lags significantly behind MasterCard and Visa in terms of revenue and EPS growth. However, this is reflected in the cheap valuation multiples of American Express compared to its competitors.
In addition to having the highest yield of all three companies, American Express also generates the most revenue by far, despite being the smallest company in the group. Impressively, American Express is expected to generate more than twice the revenue of Visa and more than three times the revenue of MasterCard in 2014.
The growth story
The payments solutions space is one of the hottest industries in the market right now, and it's easy to understand why. As technology advances and allows consumers to pay for products and services more easily and securely, cash becomes a less relevant form of payment each year and the demand for credit and debit cards grows.
Although it may not seem like it since domestic credit card use is so popular, this positive trend is still happening in the U.S.. Only last year, MasterCard CEO Ajay Banga estimated that 50% of consumers in the U.S. still use cash and checks as their primary forms of payment.
The true growth potential lies outside of domestic markets, however. Banga estimated that 80% of consumer transactions are still done using cash in non-domestic markets. As urbanization increase across the world, more consumers are being introduced to the conveniences of credit/debit cards and the various platforms through which they can be readily used.
A slightly different business
American Express has a strong brand image, perhaps the strongest out of all of the major credit card companies. This is largely because the cards issued by the company have traditionally been geared toward a wealthier clientele.
American Express and investors stand to benefit from this in several ways. The company's business can be seen as relatively dependable as wealthier consumers are often less vulnerable to short-term economic volatility. American Express customers are often very loyal as well. As Warren Buffet famously said of the company's brand, it is "synonymous with financial integrity and money substitutes around the world." A loyal customer base translates into repeat business opportunities for American Express, which only adds more stability to the company's revenue stream.
Outside of brand image and clientele, another benefit is that the traditionally tight focus of American Express' business means that there are now significant opportunities for the company to regain business that was previously lost to competitors.
In the company's most recent earnings call, new CFO Jeff Campbell explained more about the company's potential acquisitions. "These initiatives include card and merchant acquisition, building loyalty with the existing card members and the expansion of our GNS business," he said, adding "we continue to see many attractive opportunities in the marketplace including those for new customer acquisitions."
In addition to growing through acquisition, American Express is also busy honing the focus of its businesses. The company recently reached an agreement with Time to sell its publishing unit, American Express Publishing. While this unit only accounted for a small portion of the company's total revenue, when combined with similar moves made by management in recent years it illustrates just how intent management is on focusing American Express' business mix. A tighter business often means a more efficient business, and this gradual transition by management should benefit the company and investors in the long-term.
Lower risk
While American Express offers investors less growth overall compared to competitors, it also offers investors significantly less risk. With a higher yield and much cheaper valuation multiples, American Express is a great way for investors to capitalize on the strong growth in plastic without buying the industry's two high-flying superstars.
