Gotta Give 'em Some Credit
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been a rough last few years for bank and credit card companies. When the credit bubble popped in 2008, someone had to be the scapegoat. Since it wouldn’t be popular to point the finger at the man in the mirror for spending money we didn’t have, we decided to fault credit card “sharks” for preying on us poor defenseless consumers.
That has sparked a whole new set of laws and legislature in Washington effectively changing the way the companies in the financial sector do business. I personally don’t think it was necessary. I think that when you sign a contract knowing that your interest rate will go up, and your credit card company is going to charge you a fee for a late payment, you have no right to complain after the fact. The way I see it, the companies in the financial sector have a right to make a profit. If we don’t like it as consumers, then we don’t have to use their services.
But it doesn’t matter what I think. I’m not in charge. Banks and credit cards were blamed, and changes were made. I was scratching my head as to how they were going to recover from such changes, but I’ll give them some credit, they are coming through just fine.
One company I’ve been impressed with is American Express (NYSE: AXP). They have been able to grow the bottom line now for three straight years. This past quarter showed that net profit was slowing down. For the first half of 2012 they were only up 11% over last year, but that is still pretty good growth. They have a modest, but consistent dividend going, and stock price is up nearly 20% this year. Everything points to this company being on track and headed in the right direction.
Of course all credit card companies have some inherent risks, and American Express is no exception. The company sighted what all global companies are beginning to express: the fluctuation of foreign currency. That might seem like not a big deal, but trust me it is. Currencies can fluctuate regularly 1% a day. If you have a little percent like that consistently taking a nibble at profits, it can eventually result in a big hole. They also cited their debt ratings by entities like Fitch and S&P. If their debt gets downgraded it would result in higher borrowing costs. Yet these two concerns don’t bother me much, as really all companies have to deal with these things.
While American Express is good, I believe we can do one better. eBay’s (NASDAQ: EBAY) Paypal is becoming the standard go-to online currency. Really this isn’t new, but the trend continues to gain momentum. It is the online currency. eBay grew 27% last year, but they admitted this was thanks to Paypal’s 29% growth. That is pretty significant growth.
Paypal may dominate the cyber world, but look out; it’s coming to the real world. Home Depot (NYSE: HD) accepts Paypal in over 2,000 of their stores. Now some more stores are getting in on the action including Abercrombie, American Eagle, and Jamba Inc. If this trend continues, the day may come when we can actually hold a Paypal plastic card in our hands. There is already a Mastercard that gives rewards for Paypal, but I’m talking about an actual card from Paypal itself. In short there is a lot of room for growth on the horizon.
What eBay doesn’t offer, and won’t offer anytime soon is a dividend. In their year-end report they said they never have paid a dividend, and don’t plan to. That would be one advantage that American Express has here. So the choice is growth through profit growth and subsequent stock value, or growth through dividends. I personally would take eBay.
One More Thing
The price to earnings for these two companies is 13 for American Express and 15 for eBay. Given that eBay is growing at a 27% percent clip and American Express at an 11% clip, I think that also clearly shows that in this case eBay is the better value. Not that American Express would be a bad investment; I think they are both pretty solid. But if I had to choose one I’d go with faster growth, better value, and a brighter future.
thequast has no positions in the stocks mentioned above. The Motley Fool has the following options: short OCT 2012 $55.00 puts on American Express Company, short OCT 2012 $60.00 calls on American Express Company, and long OCT 2012 $65.00 calls on American Express Company. Motley Fool newsletter services recommend American Express Company, eBay, and The Home Depot. 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.If you have questions about this post or the Fool’s blog network, click here for information.