The Credit Card Industry's Best Brand Is Poised For Growth

| About: American Express (AXP)

The term American Express (NYSE:AXP) is synonymous with exclusivity, sophistication and high quality customer service. The American Express brand is currently ranked No.24 in the world by Interbrand. As the table below shows, the company has over 97 million cards issued worldwide and enjoys three to four times more spending per card than its competitors MasterCard (NYSE:MA) and Visa (NYSE:V).

Source: 2012 Visa Annual Report

The company is also the most profitable closed-loop credit card network in the U.S., providing credit and travel services to affluent customers.

The company's fourth-quarter earnings give a clear signal of the changes introduced within the company and its plan to grow its already solid performance.

Earnings Weak but Signal Growth

For the fourth quarter, net income for the company fell 47% owing to a pre-announced re-structuring, award redemption and reimbursement write-offs that amounted to approximately $895 million. The New York-based company also posted a net income of $637 million for the quarter, or 56 cents per share compared with $1.2 billion, or $1.01 per share, in the same period last year. Revenue for the quarter rose 5% to $8.14 billion. Additionally, cardholder spending increased by 8% for the quarter.


Revenue Growth 2011-2012

Net Margin FY 2012

Return on Equity
FY 2012

American Express








Capital One








Source: Company fourth-quarter earnings releases and supplements; Visa's fiscal year 2012 ended September 30, 2012.

American Express' performance is similar to that of its competitors, even without adjusting for one-time items. Compared to Capital One (NYSE:COF) and Visa, revenue growth for AmEx is modest. Capital One is clearly the winner of the three, but that is mainly because of the two large acquisitions the company made in 2012: ING Direct and HSBC's U.S. credit card portfolio.

Though AmEx has a decent net margin, it only outperforms Citigroup (NYSE:C). Visa has the highest net margin, but the company earns most of its income from service and data-processing revenues that may lower operating expenses, driving net margins higher.

American Express has the best rate of return on equity amongst all, with Citi in last place owing to the impact from recent legal woes.

Buyback & Dividend

AmEx's board has announced a buyback plan of up to 150 million shares of its common stock. The new plan replaces the earlier programs that had about 70 million shares remaining. As per the new plan, American Express will buy up to $3.2 billion of its stock during the last three quarters and an additional $1 billion in 2014's first quarter. Along with the buyback plan, the company also announced a quarterly dividend of 20 cents per share that will be paid on May 10 to shareholders of record on April 5.

Job cuts

As part of its restructuring initiatives, American Express is planning to reduce its workforce by 5,400 jobs, mainly from its travel business, which has been buffeted by what the company called a "digital revolution." The job cuts will take place at all levels of the company.

The objective of these restructuring efforts is to make American Express more nimble, more efficient and more effective, considering an uneven economic recovery. With such measures, the company plans to limit an increase in the annual operating expense to less than 3%.

Investments in Mobile and Online Platforms

With the changing preferences of consumers towards mobile and online platforms, American Express has also stepped up its acquisitions and investments efforts in the same direction over the past few years.

In January 2010, American Express acquired Revolution Money Inc. for about $300 million and has incorporated the company into its Serve platform. Revolution LLC launched Revolution Money in 2007 to provide consumers with security advantages and a high-tech online payment platform.

American Express unveiled 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, which has an app available on the App Store, Google Play and Windows Phone, is expected to be a versatile, cheaper alternative to traditional prepaid accounts. As the lead investor in providing mobile payment services, American Express has combined Payfone's mobile payment service with the Serve platform. The advantage of combining Payfone's services is that Serve customers have gained the ability to purchase goods online using their mobile phone number.

Apart from mobile and online platforms, American Express has also increased its focus on debit cards. A joint venture between American Express and Wal-Mart (NYSE:WMT), Bluebird, is a combination of prepaid debit card and no-fee checking account. Through this service, American Express is hoping to expand its share in lower income consumers by targeting Wal-Mart shoppers who might leverage the no-fee checking.

American Express has also integrated its services with Apple's Passbook. Passbook can be viewed as a mobile wallet allowing iPhone and iPod touch users to keep frequently used cards at their fingertips, plus boarding passes from American Airlines or United, or movie tickets from Fandango. In the initial release, AmEx will only be able to notify the users when a new transaction takes place. But cardholders will enjoy the ability to check current balances and access other recent transactions and customer service information. The real-time notification capability allows AmEx to have a two-way dialogue with consumers that hasn't really existed before.


Owing to its agreements and acquisitions, American Express is very well positioned to gain an advantage from the changing payment methods, growth in mobile and online payment platforms and overall increase in credit transaction volumes. The company's ongoing investment in both mobile and online platforms, along with innovative products and expansion in the emerging markets, will help the company remain competitive and innovative going forward. With favorable value ratios and strong growth indicators, the company will be a good addition for investors seeking long-term benefits.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Black Coral Research is a team of writers who provide unique perspective to help inspire investors. This article was written Aman Jain, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Black Coral Research is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.