Industry Trends and Smart Investments Facilitate Top-Line Growth
American Express (AXP) is strategically positioned to benefit from the global shift in payment methods, growth in mobile and online payment platforms, and overall increase in credit transaction volumes. Investments in both mobile and online platforms, introduction of new products, and ventures into new markets will allow American Express to remain competitive and innovative going forward. American Express' value ratios are favorable and growth indicators are strong internally and strong relative to the credit services industry.
The credit services industry has been benefiting from the global shift in payment methods and will continue to benefit in the long-term. The shift is away from traditional cash and checks, to credit and debit cards. Payment volume has steadily risen, with the exception of the recession years, and is forecasted to keep rising. The annual Credit Card Brands study published by the Nilson Report found that the total number of credit card transactions on all major worldwide card issuers (e.g. AmEx, MasterCard (MA), Visa (V), UnionPay) increased 12.1% from 2010 to 2011.
These trends can be attributed to both the wider acceptance of electronic payment methods by merchants and consumers, and the constant development/expansion of e-commerce platforms. These industry expansion trends are all positive growth drivers and signs of continued revenue sources for American Express.
Investments in Mobile and Online Platforms
American Express has stepped up its acquisitions and investments in mobile and online platforms in the past few years.
It acquired Revolution Money Inc. in January 2010 for about $300 million. Revolution LLC launched Revolution Money in 2007 to provide consumers with security advantages and a high-tech online payment platform. American Express incorporated Revolution Money into its Serve platform.
American Express released the Serve platform in early 2011 as an online prepaid account that can be accessed from a traditional card, the internet, or a mobile app. Serve has an app available on the App Store, Google Play, and Windows Phone. It is meant to be a versatile, cheaper alternative to traditional prepaid accounts.
To further improve and expand Serve, American Express invested in a round of funding for the mobile payment service provider, Payfone. American Express was the lead investor in the round of funding that took place in April 2011. Since then, Payfone's mobile payment service has been combined with the Serve platform. The key advantage that Serve customers have gained is the ability to purchase online goods using their mobile phone number.
Credit card companies have stepped up lobbying pressure on retailers to purchase the equipment necessary to accept mobile payment methods, such as RFIDs and NFCs.
American Express is not only focusing on mobile and online platforms, but also on debit cards. Bluebird is a joint venture between American Express and Wal-Mart (WMT). It is a combination prepaid debit card and no-fee checking account. Through Bluebird, Wal-Mart can offer banking to low-income customers and American Express gains access to a huge group of potential customers.
Looking to target global and emerging markets, American Express worked with ICBC and UMPay to design the ICBC Mobile Payment American Express Card. It is China's first dual-currency credit card with mobile payment capabilities. It was officially launched by the Industrial and Commercial Bank of China (ICBC), Union Mobile Pay (UMPay) and American Express. The joint card combines the credit card platform of ICBC, the mobile e-commerce services of UMPay, and the global merchant network and marketing resources of American Express.
The Enterprise Growth Group and the Strategy & Business Development Group are driving American Express' success. The EGG focuses on generating alternative sources of revenue on a global basis through acquisitions as well as internal projects. The SBDG is the internal consulting division of American Express and the think-tank for new business ideas. It is comprised of three areas of focus: Strategy Consulting, Business Development, and Mergers & Acquisitions.
AmEx has consistently traded around its 12.9 P/E Ratio since mid-2010, 42% below the credit services industry average P/E of 22.29. Share price and earnings have both appreciated roughly 260% in the last two years, causing a stable P/E. AmEx's P/E ratio is significantly lower than the industry average and sector average.
Creating a ratio of AmEx's five year P/E over a seven-company benchmark index P/E shows the ratio is lower than the 5-year ratio average of 0.84. During recession recovery, AmEx was more expensive relative to the 5-year ratio average, but since 2011 the ratio has been descending toward the average. In 2012, it fell below the 5-year average, signaling AmEx is now at a good value relative to the benchmark. Companies included in the benchmark index were Visa, MasterCard, Discover (DFS), Capital One (COF), Equifax (EFX), (CIT), and Cash America (CSH).
AmEx's return on equity is at a high 27% and is fully recovered from 2009 levels. It experienced significant increases from 2010 to 2011, pulled back slightly in 2012, but increased from Q1 to Q3 of 2012. Repurchasing shares will raise return on equity without adding actual value to a company (e.g. lowering costs to increase net income) because it decreases shareholders' equity. Although AmEx has a share-repurchasing program for 2012 and 2013 to buy back around $5 billion of the company, it has pledged to devote 50% of its cash for investments and value/growth creation.
Purchase of PPE 2011:(1,189) 2010: (878)
Acquisitions 2011: (610) 2010: (400)
AmEx's 5-year ROE average is high for the industry, with only MasterCard above it. Although MasterCard is higher, MA has decreased substantially since 2010, while AmEx has been appreciating.
AmEx's EPS has also made a strong recovery out of the recession. It has increased both QtQ and YtY. EPS growth has slowed in 2011 and 2012 as the company comes out of the recovery stage. 2012 is estimated to be a "slow" growth year even though it is still a 7% increase YtY. Forward-looking estimates expect EPS growth to rise back above 10% within 2 years.
Revenues, net income, and net margin recovered since 2009 and surpassed pre-recession levels. By revenue, American Express almost doubles the revenue of Visa and MasterCard combined with $33.4 billion ttm. It also generated more operating cash flows than either MasterCard or Visa, showing not only higher revenue, but also better efficiency and margins.
The company pays out a 1.4% dividend, slightly higher than the industry average of 1.2%.
American Express is exposed to credit risk linked to consumer debt. They are also exposed to market risk, liquidity risk, and operating risk. They hold $5B in state/municipal securities but have no exposure to European sovereign debt. In the past few years they have had increased regulatory burden from the CARD Act, Durbin Amendment, and Gramm-Leach-Bliley Act. American Express is impacted by economic events in ways similar to any major financial company.
Analysts who cover AmEx have 12-month price forecasts between the range of $50-$70, with an average target price of $64.