by Charles Sizemore | January 14, 2014 11:49 am
American Express (AXP) releases earnings on Thursday, and the credit card giant’s results will offer insight into more than just the recent performance of AXP stock.
As the first of the major credit card companies to release earnings for the holiday shopping season, AXP’s results will give us a glimpse of what to expect from the retail sector and of the health of the weary American consumer.
Rivals Visa (V) and MasterCard (MA) report earnings on January 30 and January 31, respectively.
The consensus estimate for fourth quarter earnings is $1.26 per share, though if recent history is any indication AXP will beat the estimate by a few cents.
Analysts have consistently underestimated AXP’s proifits; actual earnings have come in higher than consensus in every reported quarter of 2013.
All the same, I know better than to play the earnings guessing game. Over any reasonable timeframe, a single quarter’s results have very little bearing on your investment returns.
Valuation and underlying macro trends have a much greater impact.
So, how does AXP’s valuation look at current prices?
AXP stock trades for 20 times trailing earnings and 16 times expected 2014 earnings. That’s not cheap by any stretch, but in a broadly overpriced market it’s not noteworthy for being expensive.
As a point of reference, Visa trades for 29 times trailing earnings and 21 times forward earnings. For MasterCard, the numbers are 32 and 26, respectively.
American Express should trade at a discount to Visa and MasterCard because it is a very different kind of company. Unlike Visa and MasterCard—which are essentially electronic toll roads that depend on banks to issue their branded cards—American Express actually makes loans.
And while AXP is a very profitable company, its return on assets is consistently smaller than those of its nimbler rivals. So, AXP stock would appear to be reasonably priced relative to its peers, but the whole sector looks a little on the expensive side.
Looking at the macro picture, there is a lot to like about credit card stocks. As the world shifts to a cashless economy—and as millions of emerging market consumers join the ranks of the global middle class—the percentage of total transactions continues to grow.
In the United States, “plastic” account for about two thirds of all point of sale transactions, and cash is expected to fall to just 23% by 2017. Overseas, plastic accounts for a significantly lower percentage of transactions, but acceptance is growing at a faster rate.
In fact, I’ve argued since 2010 that the credit card stocks are actually indirect plays on emerging market growth.
Still, there is an awful amount of optimism built into current prices, and AXP stock, V stock and MA stock are up 42%, 36% and 53% over the past 12 months, respectively.
I would consider taking a position in all three if the sector had a good 15%-20% pullback.
But for now, giving the pricing discrepancy, I think investors would be better off avoiding these indirect emerging market plays and focus instead on emerging market stocks themselves.
As I wrote recently, emerging and frontier markets are attractively priced, and new ETF options make investing in these markets easier and less expensive than ever.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long PM and MO. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.
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