American Express (NYSE:AXP) demonstrated solid earnings and revenue growth in the first half of 2013, thanks to a recovering economy in both the US and abroad. The stock is up around 30 percent in the last 12 months, slightly outperforming the S&P 500. Will American Express continue to enjoy success in the long-term? Let’s use our CHEAT SHEET investing framework to decide whether American Express is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
C = Catalysts for the Stock’s Movement
American Express announced earnings per share of $1.27, a 10 percent rise from the previous quarter. Additionally, total revenues increased 4 percent for the quarter on a year-over-year basis. Sales from all major operating divisions — U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services — increased during the quarter. Currently, about two thirds of the company’s billed business comes from the United States. However, American Express’s International Card Services division led company growth this quarter, at 17 percent.
American Express separates itself from competitors with its “closed-loop network,” where it functions as both the consumer and the merchant’s bank for all transactions. The closed-loop system allows American Express to collect and analyze information about its consumers to use in a target-oriented marketing strategy. The company is able to customize promotional offers for its cardholders with this information, and issue them through its Membership Rewards program. While competitors Visa (NYSE:V) and Mastercard (NYSE:MA) use a similar marketing approach, they do not have the benefit of detailed consumer spending information collected through a developed closed-loop network like American Express.
American Express targets higher-spending and higher-net worth customers. This business model is attractive in two ways. First, the company earns higher revenues per swipe than its competitors. Merchants are willing to pay higher fees to American Express because its consumers are more likely to spend larger amounts at their stores. Second, American Express’s write-off rate is lower than at other companies, because of the low credit risk posed by most of its customers — the company’s worldwide reserve release decreased 70 percent from the previous year’s quarter, helping profitability in the second quarter. As consumers get back on their feet, American Express’s reserve releases should decrease further, helping profitability.
E = Earnings are Mostly Increasing Year-over-year
American Express has shown strong earnings per share growth in the last two quarters. The company reported earnings per share of $1.27 in the second quarter — up 10.43 percent from the same quarter last year. CEO Ken Chenault attributed leaner business operations to the recent earnings growth. Revenues in the US have increased in the past five quarters, largely due to renewed consumer confidence coming out of the financial crisis — the Thomson-Reuters/University of Michigan final July consumer sentiment index was the highest it’s been since 2007. Revenue growth was lower than analysts’ expected, however. One reason for this was that the discount rate that American Express charges merchants for transactions fell two basis points.
|2013 Q2||2013 Q1||2012 Q4||2012 Q3||2012 Q2|
|EPS Growth YoY||10.43%||7.48%||-44.36%||5.83%||4.55%|
|Revenue Growth YoY||3.52%||3.88%||5.15%||3.84%||4.56%|
*Data sourced from YCharts
T = Technicals on the Stock Chart are Mixed
American Express currently trades at $75.34, above its 200-day moving average of $68.15, but below its 50-day moving average of $75.39. American Express has experienced an uptrend over the past year — up around 29 percent in the last 12 months. As you can see in the chart below, the 50-day moving average has provided a resistance level for the stock. Shares are currently trading around 5 percent below their 52-week high set on July 15.
American Express has recently enjoyed solid earnings and revenue growth, due to rebounding consumer confidence and successful cost-cutting initiatives. The company currently trades at a trailing price to earnings multiple of 18.38, below the industry average of 20.4. The stock currently trades at a price to book ratio — the price divided by total assets minus intangibles — slightly higher than that of the industry. However, American Express’s strong brand equity and reputation might justify this rather high multiple.
American Express faces increasing competition from alternative payment methods, such as PayPal and Square. While most of its recent growth has come from emerging markets, it remains to be seen whether this growth can continue. Many emerging market consumers and merchants might skip credit cards all together, and adopt alternative payment structures. American Express, however, continues to demonstrate growth, and is priced at a slight discount to the industry. American Express is an OUTPERFORM.
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