American Express: Lean Green Machine
An analyst says the market doesn't appreciate the value of the world's most famous card issuer.
American Express continues to charge ahead. More customers are tucking AmEx cards into their wallets and whipping them out to make ever-larger purchases. That's helped build strong momentum for AmEx's revenues and earnings. Yet Stifel Nicolaus analyst Chris Brendler doesn't think the market is giving this card issuer (symbol AXP) its due. So he says now is a good time to invest.
The reasons are familiar if you've been following news developments at AmEx. It spun off its lower-margin financial planning and money-management business last year. And while that business, now called Ameriprise Financial, is fine, Brendler says the separation makes AmEx into a leaner, meaner -- and more profitable -- machine. He says the card business's growth and profitability have both outpaced his expectations over the past year, with return on equity, a measure of profitability, at 33% in the second quarter. It was around 20% in the years before the spinoff.
AmEx customers spend much more than the average credit-card holder. And in return for delivering freer-spending customers, AmEx charges merchants higher transaction fees. Also, AmEx processes its transactions on its own network, so AmEx gets the full benefit from each swipe. It's also partnering with other financial institutions to issue co-branded cards, with the transactions processed on the AmEx network. The company recently introduced cards with Bank of America and USAA.
AmEx spends heavily on marketing, promotions and rewards programs, and Brendler says the stock market sometimes frets that the company is laying out too much on these expenses. But he disagrees, saying the market misunderstands that AmEx could throttle back on spending if it wanted to without suffering financially.
AmEx's second-quarter earnings, released on Monday, were about in line with predictions. As always, the company's earnings report is complicated, with one-time items like a gain from the sale of its Brazilian card business and write-downs due to higher-than-expected costs of redemptions from the membership rewards program. But the key to the stock is the growth of the card business and the widening profit margin. It's certainly not overpriced. The stock closed Wednesday at $52, which is 17.5 times the average analyst earnings estimate of $2.96 per share for 2006. Brendler thinks shares could reach $62 over the next year.