Can American Express Earnings Keep Up With Visa and MasterCard?
American Express will release its quarterly report on Thursday. The renowned charge card company has earned its way back from the financial crisis with a solid recovery. Yet with AmEx's growth rates lagging behind those of larger card-network rivals MasterCard and Visa , the question for American Express earnings is whether the company can make the most of its favorable high-income demographic while at the same time appealing to a broader base of potential customers across the income spectrum.
American Express has worked on a strategy to take advantage of both of its strengths. Its continued emphasis on high-added-value card memberships and its proprietary membership-rewards program has helped it shore up its traditional customer base, while its Bluebird prepaid-card partnership with Wal-Mart has opened the door to new customers who haven't historically gotten much attention from the financial industry. Let's take an early look at what's been happening with American Express over the past quarter and what we're likely to see in its report.
Stats on American Express
Analyst EPS Estimate
Change From Year-Ago EPS
Change From Year-Ago Revenue
Earnings Beats in Past 4 Quarters
Can American Express earnings keep growing?
In recent months, analysts have gotten a lot more confident about their views on American Express earnings, boosting their fourth-quarter estimates by a penny per share and their full-year 2014 projections by a much more substantial $0.50 per share. The stock has stayed on the rise, soaring more than 20% since early October.
AmEx started out on the right foot with its third-quarter earnings report, which included revenue gains of 6% and net income jumping 9%. As a result of extensive stock buyback activity, American Express actually boosted its earnings per share by 15%. Even though returns on equity fell and expenses jumped 5%, CEO Ken Chenault emphasized the gains in credit quality that have helped AmEx recover so strongly.
Much of AmEx's success stems from the fact that it caters to the luxury market, which, in general, has held up better in recent years than more mainstream cardholders. AmEx leads Visa and MasterCard in terms of per-user spending, a key metric for any card network that generates revenue based on spending volume. Even though it maintains credit risk by issuing its own cards, American Express still gets more than half of its revenue from merchant fees, helping it participate in the profit potential from the spending activity of its customers.
One threat AmEx faces comes from the fact that it relies on its retail banking operations for some of its capital. Currently, AmEx pays relatively high interest rates in order to lure savers to keep their deposits with the bank. Yet if other banks start to compete more strongly with American Express, it could have difficulty holding onto those deposits, which offer capital at relatively low costs compared to other sources of funding.
Yet in terms of valuation, investors value Visa and MasterCard more highly than AmEx. That might well be due largely to AmEx's credit risk and the more impressive growth rates that MasterCard and Visa have produced lately, but it also has some investors nervous as the bull market approaches the end of its fifth year.
In the American Express earnings report, watch to see what impact continued reductions in share counts have on earnings per share. Given the stock's high share price, investors should worry that AmEx is buying high when it comes to its stock buybacks, especially if the recovery is starting to get long in the tooth.
Are credit cards going to be obsolete?
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them, but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.
Click here to add American Express to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Can American Express Earnings Keep Up With Visa and MasterCard? originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.