Using American Express As A Bellwether For Capital One

| About: American Express (AXP)

American Express (NYSE:AXP) was expected to report Q4-2012 earnings on January 17, but pre-reported yesterday. Revenue grew almost 5% year over year, which was in line with estimates. Card member spending grew 8% year-over-year and recognized a $400M restructuring charge. This charge will go to funding severance payments related to 5,400 layoffs, which is around 8.5% of its total workforce.

The more spending-conscious consumers has helped the credit card company keep default rates at historically low levels in 2011 and 2012. Besides sustaining over 25% return on equity growth, American Express management expects to consistently invest 50% of its excess capital in the business while paying out the remaining 50% to the investors through dividends and share buybacks. Its re-engineering program is expected to be completed by the end of 2012, where management expects to generate annual cost savings of $70 million from 2012 onward.

Even with the solid growth and prospects of American Express, it might be trading ahead of itself based on valuation, at 14x earnings and 3.5x book value. Other big credit card companies Discover Financial Services (NYSE:DFS), Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) will be posting earnings several weeks away. Discover -- March 18, Visa -- February 6 and Mastercard -- January 31. Discover pays a relatively low dividend yielding 1.4%, albeit the highest among the credit card stocks. The two major debit card issuers Visa and Mastercard trade high on a book value and earnings per share basis. Visa is 50x earnings and 4x book value, whereas Mastercard is at 31x earnings and 10x book value.

Capital One Financial Corp. (NYSE:COF) is expected to post earnings on January 17, which is expected to come in strong thanks to its credit card businesses. Quarterly earnings are expected to be up 80% year-over-year for the quarter. Last quarter, Capital One posted revenue up 14% and net interest income up 16% -- with net interest margin up to 7%. The credit card segment encompasses consumer and small business card lending and its consumer/commercial banking segments include lending and deposit gathering for retail and business consumers.

With a competitive deposit market, Capital One was gearing up deposits nearly 66% year-over-year to $213 billion in the first nine months of 2012, driven by the addition of deposits from the ING Direct acquisition. Capital One has also shored up its credit card portfolio by acquiring HSBC's U.S. credit card business. From a dividend standpoint, Capital One has the most to grow, where the credit card company pays a dividend yielding only 0.4%. As of Q3-2012 Capital One was well capitalized with capital ratios coming in at Tier 1 capital of 12.7%, Tier 1 common ratio of 10.0% and leverage ratio of 9.9% -- well above the regulatory requirements.

Based on the American Express' earnings release and the price performance, Capital One could be set up to outperform with its upcoming earnings announcement. The credit card company has the best debt-to-capital position at 50%, where American Express is at 75%, and Capital One also trades the lowest at 1x book value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.