Playing an Industry Trend
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
American Express (NYSE: AXP) has rewarded investors over the past four years. However, based on the broader market’s significant rally, this should be expected. It should also be noted that American Express has underperformed MasterCard (NYSE: MA) and Visa (NYSE: V) over the same time frame. Then again, investing is about looking ahead, not forward.
American Express is different
MasterCard and Visa rely solely on processed transactions. American Express, on the other hand, distributes its own cards, which leads to more collected fees. Unfortunately this also means higher costs.
American Express has needed to use leverage to fuel growth, which is evidenced by its lofty debt-to-equity ratio of 3.10. MasterCard and Visa have no debt whatsoever, which is what makes their business models so appealing to investors. It also makes MasterCard and Visa more resilient to stock market corrections. However, the current economic environment supports American Express more than its peers.
As you might have figured out, we’re living in two different worlds. One is the Main Street economy, where the middle class is suffering from lower wages, increased taxes, and increased gas prices. This has led to a weakened consumer that shops for value at every corner.
Consumers were best behaved during the financial crisis. At that time, people realized that you couldn't live on borrowed money, and that the bill will eventually have to be paid. People were saving, and responsibility was taking over. Then, Mr. Bernake stepped in and offered some economic stimulus. While it took awhile; stocks, real estate, and borrowing began to rage once again.
Now, we’re living in Fantasyland Part II. And the sequel is going to be longer than the original. Unfortunately, the ending might also be worse. But the good news is that the current economic environment favors companies like MasterCard and Visa. If consumers are confident about the direction of the economy (as they're so often told by the media), then they're likely to increase their use of credit.
The other economy is the Wall Street economy, but it also pertains to real estate. Some claim that Bernake isn’t the reason for the ascent in equity and real estate prices, but that is not necessarily correct. If that were the case, then Bernake would have stopped trying to stimulate the economy long ago.
In this economic environment, high-end consumers, or those who have had capital to invest, are doing very well. The difference between these consumers and the middle-income consumers is that these consumers can afford their purchases. Therefore, racking up debt isn’t an issue. It’s more about how long the stock and real estate markets can continue to climb. If the rally continues, then high-end consumers will continue to spend money and the credit card companies do well.
If you’re looking to invest for the long-term and you’re not concerned with broader market conditions, then American Express should be a good option. After all, American Express has been in business since 1850 and it’s likely to weather any storm.
American Express sees $888 billion in annual purchase volume, which is higher than any other credit card in the world. The company operates in 130 countries, and it has $153 billion in assets. It has won five consecutive J.D. Power and Associates awards for Highest Customer Satisfaction Rating. Its reward programs lead to superb customer loyalty, and it offers management and information insights to assist merchants.
On average, American Express cardholders spend 4 times more than MasterCard members and 3.5 times more than Visa cardholders. In the second quarter, American Express cardholders increased their spending by 4%.
On the “negative” side, American Express has failed to reach its goal of 8% revenue growth for eight consecutive quarters. Over this time frame, revenue growth has come in between 3.5% and 6%. While shy of its stated goal, that's still nothing to worry about.
American Express is well-positioned, but keep in mind that markets don’t appreciate forever. If investments fail and discretionary income suffers, it will severely impact American Express. Like many consumer-reliant stocks throughout the broader market, the near term looks good, but that could change on a dime.
As far as resiliency versus peers, MasterCard has offered the most consistent top-line growth, but it also reported a loss in 2008, whereas Visa reported a small profit, and American Express delivered a healthy profit. That said, some investors were frightened by the steep revenue decline for American Express from 2008 to 2009. During that same time, revenue increased for MasterCard and Visa.
If you’re confident that the economic recovery is for real, then American Express is a great investment. Heck, even if you want to invest in a strong company without trying to time the market, then this is a solid option. Perhaps it's time you took a harder look at American Express; it really is a great business.
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Dan Moskowitz 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!