American Express' Impressive Run Likely to Continue

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Shares of American Express gained an impressive 46% in 2013. In the first twenty eight days of this year, the company's stock has continued its impressive run and rallied a huge 5% on Jan.17, 2014 after it delivered spectacular fourth-quarter 2013 results. So what is this love affair that investors have with Amex's stock, and can the huge run-up be sustained?

American Express is not the only card company flying high. The other "kings of plastic," namely Visa , MasterCard , and Discover Financial , also killed the market in 2013 with impressive share gains and healthy top and bottom-line growth.  MasterCard's rip-roaring 60% share gain was the icing on the cake. Let's have a look at why Amex's stock is roaring, and what the future holds for the credit card company.

 

Visa

MasterCard

American Express

Discover

Ticker

V

MA

AXP

DFS

Share price (01/28)

$220.96

$78.83

$86.64

$55.29

2013 returns

35.7%

60.9%

46%

36.7%

Market Cap

$140.65 billion

$91.64 billion

$92.18 billion

$26.1 billion

Revenues

$11.8 billion

$8.1 billion

$30.4 billion

$6.8 billion

Profit margins

42.3%

38.2%

15.4%

34.5%

Return on Equity

18.3%

42.5%

24.2%

26%

Net Income

$4.9 billion

$3.1 billion

$4.6 billion

$2.3 billion

Earnings per Share

$7.59

$2.58

$4.91

$4.46

Forward Dividend Yield

0.8%

0.3%

1.1%

1.5%

Price to Book

4.7x

12.0x

4.8x

2.5x

Price to Forward Earnings

19.8x

25.5x

15.5x

10.4x

Solid fourth-quarter results
American Express reported highly impressive fourth-quarter results for fiscal 2013, with net income climbing an astounding 100% to hit $1.3 billion. American Express has strong holiday spending among its card members to thank for its solid quarterly results, with card member spending rising 8% during the holiday.


From the chart above, you can see that American Express has a market cap comparable to the much-venerated MasterCard's but delivers 1.5 times as much net income. This is despite sporting a considerably lower profit margin of 15.4% vs. MasterCard's 38.2%. This is mainly because Amex caters to higher-end customers and commands higher annual card fees. American Express operates as a closed network, acting as a card issuer, merchant acquirer, and as a network; this enables the company to access valuable data. American Express cards are also very popular due to the fact that the company has a very low fraud rate and enjoys higher credit quality. The firm's closed-loop network helps it run an effective single fraud screen that rival companies that operate an open-loop network would be hard-pressed to match.

American Express' management says that its billing revenue has a levered play on U.S. economic growth. Past trends show that customer billing, its main source of revenue, tends to increase by approximately 4.5 times relative to the country's economic growth. That means that if the American economy grows by 1%, the company's revenue from billings grows by 4.5%. With the projected growth rate for the U.S. economy of 3% in 2014, American Express can expect its billings to climb a solid 13.5% in 2014.

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