Does American Express stand up to Visa and MasterCard?
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Unlike both Visa and MasterCard, American Express is not just a payment network. American Express has a large amount of revenue coming from consumer credit and loans, which can expose investors to some financial risk.
In terms of transactions, how does American Express compare to its major competitors?
American Express has significantly fewer cards in issue than the other two providers, but it does have a dollar volume per card about 650% larger than Visa. American Express also has a significantly higher dollar volume per transaction. This figure includes loans and transactions from credit cards.
Unlike both Visa and MasterCard, American Express offers customers credit. Visa and MasterCard only offer a payment network; as a result, American Express has significantly higher revenues from interest repayments.
Discount Revenue represents revenue earned from fees charged to merchants with whom the Company has entered into a card acceptance agreement for processing card member transactions.
Due to the different nature of AXP’s business, revenues become difficult to compare to both V and MA.
American Express's total revenues come in about 100% higher than Visa’s. The reason for this is the high discount revenue, brought about by the higher average dollar volume. There is also a large contribution to total revenue from interest received from consumer credit and loans - an income stream both V and MA do not have.
One of the main problems with American Express' business model is the financial liabilities the company takes on through lending to customers. Although this can be a high return business, in tough economic times it can also be a very risky one.
In Q3 2012 AXP made a provision for financial losses of just under $500 million, or 7% of total Q3 revenue. However, if we look back to Q1 2009, AXP provisioned for losses of about $1,500 million, or 31% of total Q1 2009 revenue.
As a result of these loss provisions, AXP has a lower operating and profit margin than the rest of the industry
Is American Express better value than its competitors?
Compared to its competitors, American Express does look under valued on a P/E basis. I believe this is due to the slow growth rates. Due to AXP’s loans and credit division 5-yr growth has been slow, what with the losses incurred during the finical crisis. This trend is continuing, and is only just starting to recover with the rest of the economy. As a result AXP has a slow forward growth rate compared to the rest of the industry. This slow growth rate, coupled with a comparatively low P/E, gives it a PEG ratio of 2.1, higher than the rest of the industry. Lastly, American Express has a lower free cash flow than the rest of the industry.
The most important point of this comparison concerns debt. While both Visa and MasterCard have positive growing cash balances, AXP does not. In fact, AXP has a total debt to equity ratio of 0.4, or 40% of shareholder equity.
In summary, American Express has a different business model to Visa and MasterCard. Due to its involvement in consumer credit, it is more exposed to financial risk and has been struggling with the recent slowdown in consumer spending. American Express also has less international exposure than both of its competitors.
Most importantly AXP has a higher revenue than both MA and V, but this does not translate into free cash flow. However, AXP does have the highest yield in the group.
So even though both Visa and MasterCard look more expensive than American Express right now, I believe they offer significantly more future growth and the possibility for larger shareholder returns.
RupertHargreav 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!