AMERICAN EXPRESS CO. $86 (New York symbol AXP, Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.1 billion; Market cap: $94.6 billion; Price-to-sales ratio: 2.8; Dividend yield: 1.1%; TSINetwork Rating: Average; www. americanexpress.com) gets most of its revenue from the fees it charges merchants who accept its charge cards (which have no pre-set spending limit and must be paid in full each month) and credit cards (which can carry a balance).
Unlike other credit card companies, such as Visa and MasterCard, Amex is also a lender. That lets it collect interest payments on its cardholders’outstanding balances.
Default risk is lower than it seems
Lending money exposes Amex to bad loans, but it cuts this risk in two ways: it charges its cardholders higher annual fees than its rivals, and it mainly caters to clients with above-average incomes and good credit histories. In the latest quarter, it wrote off just 1.7% of its loans, compared to 1.9% a year earlier.
In addition, Amex charges merchants higher transaction fees than other card issuers. Fewer stores accept its cards as a result, but the company still does a good job of attracting cardholders, because it rewards them with discounts for travel and entertainment, based on how much they spend.
The recession cut Amex’s revenue by 13.5%, from $28.4 billion in 2008 to $24.5 billion in 2009. However, the company’s revenue rebounded to $27.8 billion in 2010, as the global economy recovered, and rose to $31.6 billion in 2012. It could top $32.6 billion in 2013.
Earnings fell from $2.48 a share (or a total of $2.9 billion) in 2008 to $1.54 (or $2.1 billion) in 2009. Earnings then jumped to $3.35 a share (or $4.1 billion) in 2010 and increased to $4.40 (or $5.1 billion) in 2012.
Reasonable p/e adds appeal
In 2013, Amex’s earnings should rise 11.8% to $4.92 a share, and the stock trades at 17.5 times that estimate. That’s still a reasonable p/e ratio in light of the company’s well-known brand and top-quality clientele. Better earnings will also let Amex raise its $0.92 dividend, which yields 1.1%.
Moreover, Amex is making good progress with its restructuring plan. This strategy mainly focuses on its travel agency business, which helps its clients arrange trips and book airline tickets, hotels and rental cars. It also sells traveller’s cheques.
The travel division is now upgrading its computer systems, so more clients will be able to plan trips online without agents. That will let Amex cut its workforce by 5%. It expects to pay $400 million in severance and other related costs, but these moves will slow the growth of its annual operating expenses to 3%. In 2012, these costs rose 5.7%.
New joint venture about to pay off
Amex recently agreed to merge its Global Business Travel operations into a new 50/50 joint venture with a private investment consortium. This group will contribute up to $1 billion to the new operation, which will help it develop new services and products. The company expects to realize a gain on this sale in 2014.
American Express is a buy.
