- A growing modern middle class in emerging economies will fuel Amex's growth going forward.
- The more deals it can do with e-commerce associated products (Apple Pay), the more profits it should make solely from the rising trend.
- Fundamentals are still very strong over 10 years. This company continues to reward shareholders through aggressive buyback schemes.
I like Amex stock for long term, but its valuation is still a bit high for me to be interested in short term. American Express (NYSE:AXP) stock trades with a forward price to earnings ratio of 13 which is a bit on the higher side considering what the company has gone through over the last few years. The loss of the Costco (NASDAQ:COST) partnership has meant the company has to increase its spending in order to compensate for lost revenues.
However, recent signs are good, with American Express closed deals recently with the Pittsburg Steelers, Sam's Club and a number of smaller retailers which will all keep volume levels elevated. Furthermore the average card acquisition which was 1.4 million in 2014 grew to 2.3 million in Q3 of this year which is encouraging. However there is no getting away from the fact that net income declined by 14% in the third quarter compared to Q3 in 2014.
Renewals in co-branded partnerships (with the likes of Cathay Pacific and British Airways) also led to more costs and it is definitely becoming more noticeable in this industry that credit card companies have to consistently do more for merchants (through fees and service) in order to fend off competitors. Therefore the company will have to keep spending elevated ( marketing rose by 8% to $850 million last quarter) to support long term growth. If the valuation can creep down a bit more, I would be a buyer for the following reasons.
Opportunities In Emerging Markets
Firstly although the company is coming up against fierce competition from the likes of Visa (NYSE:V) and Mastercard (NYSE:MA), there will always be room for a premium service in this industry. No matter how much competitors reduce their fees going forward, American Express will still be able to command a premium for the service it offers despite continually lowering its transaction costs and membership fees itself.
Whereas many analysts are bearish because of the company's recent international performance, I see this headwind as being only temporary. International card services total revenues fell by 11% to $1.2 billion last quarter (see chart) which was mainly due to dollar strength but on a currency neutral basis , revenues actually rose by 4%.
I think the 4% mentioned above is crucial, which a lot of analysts are missing. There are more Amex cards now internationally than in the US despite the US still garnering around 80% of net income which in my opinion is due to higher average income levels in the US. However as incomes start to increase in emerging economies, I can only see customers spending more on international cards over time.
Dollar weakness coupled with emerging market growth would really increase international business going forward. Once the dollar starts to weaken, we will start to get more inflation which should mean more income for American Express in emerging economies due to rising salaries and higher purchases on its cards.
Secondly e-commerce is growing at a huge rate and Amex's current elevated spending should really pay dividends (both literally and metaphorically) in the years to come. Why? Well the e-commerce market alone is predicted to double to $2.5 trillion (see chart) within 3 years which has to be good for credit card companies. Furthermore I believe that Costco fallout could be a blessing in disguise. New merchant deals will make Amex far more diversified, protecting the stock in the event of an arrangement breaking down.
Thirdly Apple (NASDAQ:AAPL) recently launched its Apple Pay program in Australia and reported that the product would only be exclusively for Amex customers. So basically iPhone users wont be able to use Apple Pay unless they have an Amex card ( which incidentally is 52% of current iPhone users ). Amex's Apple relationship enhances its premium brand and the longer its stays intact, the more cards Amex will be able to issue. The challenge here is to get more of these affluent users spending more on its cards which I think will come through its current marketing initiatives.
Furthermore when you look at the stock's fundamentals, I don't see anything untoward over a 5 or 10 year time period. The company has had positive earnings for the past 10 years and net income growth is up by 30%+. Furthermore operating margins are increasing and are predicted to reach 26% this year. On the technical side (see chart), the moving averages seem to be about to cross and the RSI level is at 44 which means it isn't highly oversold yet. Its lows for the year are $70.21 a share. We may revisit the lows but if the lows hold, we may be off to the races with this stock as I cant see it trading for less than 12 times earnings.
To sum up, American Express stock still appears to be an excellent value play when you look at the where the company is going. The Costco fallout hit the company hard, but the credit card company has responded well by investing in growth initiatives whilst also keeping shareholders happy. The company generated a 27% return on equity in the third quarter and shares outstanding were reduced by 5% during the year. This company will always trade at a lower valuation compared to traditional credit card companies due to the risk it takes on but I don't see its valuation going much lower than these levels.