I Like The Business Model And Growth Prospects Of American Express

| About: American Express (AXP)

American Express (AXP) is a company making a bigger impact in the business world every day. The company continues to grow through smart investments and aggressive growth processes. The company is also being proactive about cutting expenses in order to maximize its margins.

American Express in 2011

Last year, the company achieved strong growth with strong fundamentals. Compared to 2010, American Express earned 22% more, while the company's revenues increased by only 9%. The fact that the company was able to grow its earnings 250% faster than its revenues tells us a story about its cost-cutting strategies and the impressive margins that have resulted from such strategies. The company's goal was to post EPS growth of 12%-15%, and the company beat this by a large margin. Another impressive number for American Express was its rate of return on equity, which stood at 28%.

In average, each American Express member spent $15,000 last year, bringing the total transactions to $822 billion. This is impressive, especially considering that 2011 was a year in which global economy experienced a slowdown. The numbers also represent an all-time high for the company.

The company also experienced some market share growth in the US. In addition to the 1.6% market share growth in 2010, the company achieved another 0.8% of market share growth in the country. This trend is supported by the company's strong partnership with retail chain Costco. Currently, American Express enjoys a US market share of 26.4%.

Volume Growth vs. Profitability

Visa (V) and MasterCard (MA) usually brag about their strong volume growth, which refers to number of people holding their credit cards, number of transactions completed or in some cases both. Usually American Express doesn't get the volume growth the other two companies get because the company is more focused on volume that can actually turn into relatively higher profit. As a result, for each dollar of transaction completed, American Express earns 5-6 times as much cash flow as Visa or MasterCard do. This is why the company can afford to have far fewer transactions than other credit card companies to retain comparable earnings to them.

Spend-centric vs Lending-centric Model

While competitors such as Capital One (COF), Citi (C), JPMorgan (JPM), and Bank of America (BAC) all experienced a decline in revenue and average loan balance, American Express posted growth in both areas in 2011, compared to 2010. The company's average loan balance increased by 1%, whereas Citi's declined by 6%, and JPMorgan's and Bank of America's declined by 11% in this metric.

Credit card issues earn money in two ways. First, they charge merchants a transaction fee every time one of their cards are used for a transaction. Second, they receive interest from card holders when the balance of the cardholder is not cleared every month. In addition, some credit card issuers will also charge yearly fees on their card holders; however, often this fee may be waived.

American Express relies on a different business model wherein it charges merchants more than other credit card companies and keeps many card holders from rolling their balance to the next month. This is why American express doesn't have to rely on Accounts Receivable for revenue growth, and its earnings are safer than other credit card issuers. Of course, one major risk with American Express is that merchants might deny accepting these cards as they are more costly for them.

Quantity vs Quality

On average, American Express members spend three to four times as much money per card than Visa or MasterCard members. This is also due to American Express being more selective in accepting members. This is why the company continued to post strong growth in a year when most financial companies were struggling to even keep their past revenues. The company adds more merchants to its network and incentivizes card members to spend more by offering them cash-backs.

Short-term vs Long-term Investments

The company's investments represent a well balance of short-, medium- and long-term investments. That is, some of the company's investments will pay off in the short term, others will pay off in the medium or long term. It's always a good idea to capture such balance, as not all shareholders are focused on the same time horizon. Investing too much in long-term projects might scare away investors looking for short-term returns, and investing too much in short-term projects might scare away those looking for long-term returns. Maintaining a fine balance keeps both kinds of investors in.

The company's short-term investments usually focus on consumers, while the long-term investments usually focus on merchants. The company's goal in the short term is to attract consumers with high credit ratings and high spending habits. American Express relies on multiple types of cards, some of which carry yearly fees as high as $75.

In 2010, the number of merchants accepting American Express increased by 23%, and this number increased by another 5% in 2011. In the following years, it wouldn't surprise me if the number grew at an annual rate above 10%. The network of merchants accepting American Express grew by at least a million in each of the last two years.

Moving Forward

In the near future, the company will see growth in multiple areas. The company will take advantage of growing online shopping nicely. At the moment, there is a lot of momentum with regular retailers are being replaced by online retailers and many different kinds of services being offered on the internet for a fee. As almost all online payments are processed using a credit card, there is a strong growth opportunity for American Express in this area.

Another growth avenue for the company will be the markets outside of the US. For many countries across the world, the idea of using a credit card (or anything besides cash) for payments is a totally new idea. As this idea gains popularity across the world, there will be a lot of market share for American Express to grab. The company's focus on small- to medium-sized businesses will prove beneficial, as smaller businesses are still main drivers of growth outside of the US.


I like the management of the company and agree with what it is doing. The business model of American Express is solid and the company is in a safer position than most companies in the financial industry. The company's aggressive growth will continue for many years to come, as the company takes advantage of the growing market by taking the right steps.

Disclosure: I am long AXP.

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