Financial Security from a Plastic Card Company?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2012 draws to a close, I would like to focus on a prominent player in the global payments industry: American Express (NYSE: AXP).

 

Strengths:

  • Slow & Stable Revenue Growth: In 2006, American Express reported revenue of $27.1 billion; in 2011, the company announced revenue of $32.3 billion, representing annual year over year growth of 3.57%. This trend is widely anticipated to continue into the future, with projections estimating 2015 revenue coming in at $37.4 billion. This growth has been fueled by an increase in the number of American Express cards in circulation

 

  • Dividend: American Express currently pays out quarterly dividends of $0.20, which, when annualized, puts the dividend as yielding 1.39%
  • Comfortable Margins: At the moment American Express possesses a net profit margin of 15.00%, representing a company that is strong and profitable; these margins are a result of American Express's relatively low operating expenses and solid revenue streams
  • Lucrative Business Model: American Express serves millions of customers, all of which possess a variation of the many cards the company offers, and every time any one of these people utilize their cards to conduct a financial transaction, American Express receives a small fee, providing the company with millions of tiny, solid revenue streams
  • Institutional Vote of Confidence: 83% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Reasonable Valuation: American Express currently carries a price to earnings ratio of 13.32, a price to book ratio of 3.57, and a price to sales ratio of 2.00, all of which point a company that carries a reasonable valuation

Weaknesses:

  • Debt: Currently, American Express possesses about $56.3 billion of debt on their balance sheets, a major disadvantage for the business

 

  • Expanding Operating Expenses: While there are substantial costs related to running a business that is valued at $64.38 billion and employs 63,600 people, operating expenses have been nearly outgrowing revenues over the past years, a troubling trend

 

  • Contracting Margins: In 2011, American’s net profit margin was reported as 16.3%; however, in 2012 the analyst consensus shows net profit margin dipping to 15.8%, and in further falling to 15.6% in 2013, an ominous sign

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1870, American Express has consistently raised its dividend payouts, and this trend is widely anticipated to extend into the future

 

  • Capturing Market Share: According to the Nilson Report, based on number of cards in circulation, American Express holds an 8.0% market share of the credit card market, and capturing further market share would create a huge opportunity for American Express
  • Emerging Market Growth: American Express is an international company, and has a substantial exposure to rapidly expanding emerging markets such as China and Latin America, which should fuel growth into the future
  • Electronic Payment Applications: The future of financial transactions appears to be electronic payment applications, and American Express is at the forefront of taking advantage of this trend, with the company partnering with Apple and its passbook technology

Threats:

  • Competition: The financial transactions industry is a very competitive one, and there are several other major corporations battling against American Express
  • Sluggish Economic Landscape: In an economic landscape riddled with such uncertainty and stagnation such as the current one, consumers are less willing to conduct financial transactions, hurting American Express

Competition:

Major publicly traded competitors of American Express include Capital One Financial (NYSE: COF), Visa (NYSE: V), Mastercard (NYSE: MA), and Discover Financial Services (NYSE: DFS). All of these companies offer financial services that are similar, if not identical, to those of American Express. Capital One is valued at $34.06 billion, pays out a dividend yielding 0.34%, and holds a discounted price to earnings ratio of 9.73. Visa is the leader in the credit card industry, is valued at a staggering $101.15 billion, pays out a dividend yielding 0.87%, but carries the expensive price to earnings of 81.02. Mastercard places second in the credit card industry, is valued at $61.64 billion, pays out a dividend yielding 0.24%, but has an expensive price to earnings ratio of 28.68. Finally, Discover is valued at $19.18 billion, pays out a dividend yielding 1.45%, and carries the discount price to earnings ratio of 8.67.

The Foolish Bottom Line:

American Express is a major player in the financial transaction industry, which possesses slow but steady revenue growth and a solid dividend. The company is trading at a reasonable valuation, but possesses a substantial debt load. While American Express is a solid company, I believe there are better opportunities in the industry, with faster paced growth. Visa and Mastercard are numbers one and two in terms of market share, and are the two best investments in the industry. However, American Express is a solid investment with an unmatched level of stability.        


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend American Express Company 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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