No Limits on Upside with this Credit Card Provider

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Our stock pick this week is a credit card stock that has a strong legacy in the United States, a long history of growing profits, and the potential for a promising 2015. Credit card usage has slowly been increasing since 2011 and with more than a few credit card providers to choose from, including another favorite of ours, Discover Financial, it is important to pick from the best credit card stocks available. Our stock pick this week is American Express (AXP).

From Express Services to Credit Services

The history of American Express dates back to 1850, when it was an express shipment provider. AmEx morphed through the years and expanded its financial services segment, which has resulted in the company seen today. Present day American Express provides charge and credit card products worldwide and while only issuing 9% of all cards in circulation, accounts for 27% of all credit card purchases. It also accounts for the highest annual spending amount of the major credit providers.

Slow Growth is Better Than No Growth

Lately, American Express investors have been disappointed, as the company’s revenue growth has slowed in recent years. However, much of this can be attributed to overly high market expectations. As American Express continues to increase in size, it will be harder for the company to grow as quickly. With effective management though, the company has been able to generate higher margins and turn each dollar of revenue into more profit.

At the end of 3Q14, total revenue growth was up just 3% over the previous year. Operating income was up nearly 15% as expenses were managed and lowered from the year before. Card member spending, which has been on the rise, was up 9% year over year in 3Q14, and improving consumer spending should further this growth going forward.

In addition to its modest gains in revenue and operating profit, American Express is developing new programs that are aimed at spurring growth. A new card, Serve, is aimed at providing a solution for consumers looking for a cheaper prepaid card with features of a regular credit card. Secondly, American Express is expanding its merchant network to many small businesses through the OptBlue program. The OptBlue program will allow small businesses a solution to accept and manage American Express transactions.

Historically Strong Business

Since 2009, American Express has grown after-tax profit (NOPAT) by 18% compounded annually, while increasing its NOPAT margin from 11% to 16%. Over the same timeframe, American Express has increased its return on invested capital (ROIC) from 12% in 2009 to a top-quintile 21% in 2013. Lastly, American Express had over $5 billion in free cash flow at the end of 2013, giving it freedom to invest in new growth opportunities and return capital to shareholders.

Great Companies are Worth Spending On

American Express’ stock price was up only 4% during 2014. However, it has increased over 40% over the past two years.

At its current price of ~$87/share, American Express is neither undervalued nor overvalued. High quality companies are becoming increasingly hard to find, and investors should be willing to pay a little more for companies such as American Express. A great company like American Express still offers great upside, even at current prices.

If we believe American Express can grow NOPAT by 11% compounded annually for the next 9 years, the stock is worth $108/share today –– a 20% upside. American Express’ continued revenue growth, albeit slower, and initiatives taken to further this growth could create an even greater upside for the stock.

American Express is a great buy in today’s market full of overvalued bad companies. American Express is a fundamentally sound business with an excellent history of profitability and effective management. Add on the current dividend and buyback program and it creates an even more compelling investment.

Kyle Guske II contributed to this report.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

Photo credit: The.Comedian (Flickr)

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