American Express: What's Not to Like?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Nov. 16t, 2012, American Express had a larger market cap than MasterCard even though its stock was trading at just $54.30 a share. The company’s market cap was $60.77 billion, compared to MasterCard’s $57.99 billion. Yet MasterCard was trading at $464.69 per share on the same date. The company’s enterprise value was also nearly double that of MasterCard’s. American Express had an enterprise value of $100.42 billion compared to MasterCard’s $54.10 billion.
American Express is the bigger company, but is it a better value than MasterCard? That depends on which criteria you employ. MasterCard’s P/E ratio is higher than American Express’. The latest figures indicate that MasterCard had a P/E ratio of 26.94% compared to American Express’ 12.39%. Yet if you want to judge credit card companies on P/E ratios, Visa won; it had a P/E ratio of 45.47%, and its stock was trading at $142.32 a share on the same day.
Since Visa has a larger market cap and a larger enterprise value than either MasterCard or American Express, it appears to be a better value. Visa currently has a market cap of $115.44 billion and an enterprise value of $111.49 billion. When you compare it to MasterCard, Visa looks like a great buy, but is it a good buy when you compare it with American Express?
The answer is no, because American Express’s revenues are much higher than those of either Visa or Master Card. American Express had revenues of $33.44 billion that were steadily increasing on Sept. 30. MasterCard also had revenues that were steadily increasing, but they totaled just $7.22 billion, and Visa had revenues of $10.42 billion.
American Express also generates more cash than either MasterCard or Visa. In the fiscal year that ended on Sept. 30, it generated $14.72 billion in cash from its operations. In the same period MasterCard only generated $2.86 billion in cash from operations. Even the much smaller Discover Financial Services (NYSE: DFS) made more cash from operations than MasterCard did; Discover generated $3.01 billion in cash from operations. Visa made around $5 billion in cash from operations.
American Express appears undervalued when it is compared with MasterCard and Visa. MasterCard is obviously overvalued; there is nothing in its financials that justifies that $464.69 share price. In terms of profit margins and P/E, MasterCard isn’t doing as well as Visa, even though Visa shares trade at less than one-fourth the price of MasterCard.
If you are looking for an undervalued financial services company, check American Express out. It is generating a lot of cash for a company with such low share prices. More importantly, American Express’ revenues and cash flow seem to be growing at a rate similar to MasterCard and Visa.
American Express is also less risky than Discover Financial, and it has some intriguing growth prospects. American Express and Wal-Mart have teamed up to create something called Bluebird, a combination debit card and no-fee checking account. Bluebird lets Wal-Mart offer banking services to low-income customer,s while giving American Express access to a huge group of potential customers. The FDIC estimates that around 10 million American households have no bank account.
Even though it is undervalued, American Express is at the forefront of innovation in the financial services sector. It has been able to maintain high revenues and cash flow in a bad economy, and has taken advantage of new opportunities. If you’re looking for a classic value play in credit cards, American Express definitely fits the bill.
StockCroc1 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!