American Express Company (NYSE:AXP) finds itself in growth mode. After losing its exclusivity relationship with Costco Wholesale Corporation (NASDAQ:COST) in 2016, AmEx worked hard to turn around its earnings and has been successful. Despite high levels of growth, however, AXP stock fell in the aftermath of the latest earnings report.
The late actor Karl Malden spent years urging consumers “don’t leave home without them” when it came to American Express traveler’s checks and credit cards. The question AXP stock investors must ask now, however, is whether they should log off of their brokerage account without buying American Express stock.
AXP stock beat both revenue and earnings estimates
If revenue and earnings serve as the measure, investors should consider buying. American Express reported 2017 fourth quarter earnings at $1.58 per share. This exceeds the consensus estimate of $1.54 per share for the quarter. Likewise, revenue also beat expectations. Revenues of $8.84 billion came in $120 million higher than expected. That also represents a growth rate of 10.2% year over year.
Despite all this, AXP stock fell in after-hours trading following the announcement. The suspension of share buybacks likely prompted the fall in the stock price.
But investors should view this drop off as a buying opportunity.
These earnings numbers represent a dramatic turnaround from two years ago when Costco ended its relationship with American Express. Despite this setback, AXP stock recovered strongly in 2017, increasing in value by 40%.
AmEx has made up for the loss of Costco by improving the bottom line in other divisions. U.S. Consumer Services saw a 44% year-over-year increase in profits from this time last year. International Consumer Services and Network Services more than doubled its net income in the same period.
The company also enjoys a strong brand that has sustained it for decades. The traveler’s checks on which American Express built its reputation in the 20th century have been superseded by its credit card in the 21st. Interbrand ranked AmEx as the 27th most valuable brand in the world in 2017.
Despite losing Costco, AXP maintains 21.5% market share in the credit card industry. It lags well behind the market leader Visa Inc (NYSE:V). However, it holds almost as much market share as Mastercard Inc (NYSE:MA) and greatly exceeds that of Discover Financial Services (NYSE:DFS).
Demographics and spending trends favor AXP stock
Also, in more good news for AmEx, both demographic and spending trends currently favor the use of credit cards.
Populations in existing developed markets continue to grow. And as more countries become developed markets, people increasingly use credit cards. Moreover, the advent of e-commerce and companies like Square Inc (NYSE:SQ), which make accepting credit cards easier for smaller and smaller merchants, push more people toward credit cards.
Even if you believe the rise of bitcoin and other cryptocurrencies could take some share of the spending in the future, consumers will conduct purchases exclusively in the local currency for the foreseeable future. Also, if crypto gains more traction, it’s difficult to see AmEx or its peers not capitalizing on the digital currency trend.
Given the innate strength of the credit card sector, the question remains as to which credit card company to choose?
Analysts believe AXP, V, and MA will grow earnings by almost 20% in 2018, with DFS showing a slightly higher growth rate. Regarding valuation, Visa’s price-to-earnings (PE) ratio stands at the highest multiple with almost 44. Mastercard’s PE at 38 remains almost as high. Compared with these companies, AXP’s PE of about 19.5 looks like a bargain. Discover has an even lower PE at 13.5. Discover, however, has also dealt with charge-offs and reduced net income.
Although DFS probably would likely become the choice of risk takers, risk-averse investors would likely be best served by choosing AXP.
The bottom line on AXP stock
Investors looking to play the bull market in credit cards while taking a minimal risk should look at AXP stock.
AmEx beat estimates on both revenue and earnings. The stock took a hit due to the suspension of share buybacks. Due to demographic shifts and an economy moving toward a cashless society, however, AXP is well positioned for growth.
Moreover, American Express trades at a lower PE than Visa or Mastercard while enjoying comparable profit growth. Given its relatively low valuation and high growth potential, a position in AmEx stock remains an asset credit card investors should not leave their portfolio without.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.