Why You Might Buy This Company Despite Forex Fluctuations
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American Express (NYSE: AXP) reported a fairly solid quarter, although the results weren’t anything spectacular as the company beat analyst estimates slightly. Analysts were anticipating earnings to come in at around $1.12 per share, with American Express reporting earnings at $1.15 per share, the quarter was a success, but only by a slight margin.
Analysts weren’t impressed by the revenue American Express reported. The revenue was negatively affected by currency adjustments. American Express' historical five-year growth rate is 25%, with analysts on a consensus basis anticipating growth at around 12% on average for the next five years.
The highlights of the earnings
American Express reported declining growth. Looking closely at the image below, this may be ominous for other credit and debit card companies in the space (Visa, and MasterCard).
Source: American Express
American Express indicated that it grew total revenue by 5% over the prior year. But in 2011, the company was able to grow revenue by 9% over the prior year. The return on equity in 2011 was 28%, but it declined to 23% in 2012. This decline in return on equity implies a declining ROI from invested capital. American Express grew earnings per share by 8% over the previous year (which is good, but there are certainly better opportunities in the stock market).
Peers may be impacted
Analysts, on a consensus basis, anticipate Visa (NYSE: V) to generate EPS growth of 18.40% in the current fiscal year. Visa trades at a P/E multiple of 47. It is the dominant player in the merchant services space, which is why investors are willing to pay a premium for the company’s growth.
Visa was the first merchant services provider in the world, and it is likely that Visa will be able to maintain its competitive edge against American Express and Master Card. Visa’s distribution channel, along with market acceptance, is formidable. It is likely that Visa will continue to grow at a faster rate than American Express in overseas markets.
The key take-away is foreign exchange effects. American Express could have reported a 5% growth in revenue rather than a 4% growth in revenue, had the Dollar remained stable against a basket of currencies over the past quarter. The Power Share DB US Dollar Index Fund has rallied 4.5% since January. This translates into lower revenue and profit recognition as profit is recognized in U.S. Dollars.
The foreign exchange effect is small, but should affect Visa’s revenue growth by at least 1% - 2%. A small change in revenue and net income growth due to currency effects could have a negative impact on investor sentiment. Since Visa trades at such a high multiple, any loss of growth could affect the price of the stock.
MasterCard (NYSE: MA) is a growing player internationally, and while its track record, brand, and positioning are not as impressive as Visa, its earnings multiple is fairly high (23.79 P/E). Currency market fluctuations will probably impact the growth of MasterCard. I anticipate MasterCard to meet analyst expectations of 15.30% growth for the previous quarter, but it is unlikely that MasterCard will be able to report a blowout quarter due to the currency market fluctuations.
American Express has been able to report a fairly strong quarter. Analysts were anticipating declining growth, and American Express met those lower growth expectations (no surprise). The credit card business is maturing, and while it is unlikely that it will go away anytime soon, it is no longer generating a 25% annual growth rate (previous five years).
American Express offers a steady dividend yield of 1.2%, with growth rates projected to be 12% for the next five years. So, if your investment objectives coincide with American Express: steady yields and growth, than you should consider buying the stock.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!