Inside Wall Street: AmEx still strong as growth stock

In business for 175 years, Amerian Express is evolving into a global consumer services provider.

By Gene Marcial Sep 4, 2012 2:14PM

 Female customer handing credit card to receptionist copyright PhotoAlto, Frederic Cirou, PhotoAlto, Getty Images Not many U.S. corporate global brands last long as growth stocks. Among the members of the small club are some iconic names: Apple (AAPL), Exxon Mobil (XOM), International Business Machines (IBM), Google (GOOG), Coca-Cola (KO), and Microsoft (MSFT).


Another that definitely belongs on that list -- though it isn't as celebrated by investors -- is American Express (AXP).

American Express is a leading global payments, expenses and travel-services company. Its credit cards are used worldwide and account for a more than 26% share of U.S. purchase volume.


AmEx has been able to maintain its place and pace as a growth company by embracing change and entering new businesses, including a novel offering to cardholders of a mobile-payments system for settling bills.

In August the company quietly formed joint ventures with major national retailers, including Wal-Mart (WMT), Target (TGT), CVS Caremark (CVS), Sears (SHLD), Publix and 7-Eleven, to develop a mobile-payment network called the Merchant Customer Exchange.


The move is expected to strengthen customer loyalty for the convenience it offers. AmEx had already signed mobile-payment pacts with Verizon, Sprint, and Ticketmaster. As of June 2012, 3.7 million users have installed American Express mobile applications, according to a study by S&P Capital IQ.


Another new concept that AmEx has adopted is mobile prepaid cards, which S&P estimates is a $355 billion market opportunity. Prepaid cards are used mostly by people with no bank accounts or those with little credit background. They deposit funds to load the prepaid cards and can reload them with additional cash.


"It's possible many of the unbanked international consumers could jump directly from cash payments to reloadable prepaid mobile and skip the typical traditional checking account step," says Sonia Parechanian, equity analyst at S&P Capital IQ, which named American Express as its "Focus Stock of the Week" last week.


Rating AmEx as a "strong buy," the analyst says the company will benefit as consumers and businesses increase their spending in a more stable economy.


The stock is trading at about 12 times her 2012 earnings estimate of $4.53 a share, which is below its historical level and premium to the S&P 500-stock index. She expects the stock to rise on continuing revenue growth, increased card spending and a pickup in corporate travel spending. She has a 12-month price target of $72 a share.


"It's pretty impressive that American Express is still considered a growth company after being in business for over 175 years," says Parechanian, and the foundation for further growth has been laid, she believes, "through major investment and strategic focus on new business, particularly in the new era of mobile payments and globalization."


Consumers and businesses ultimately will want to use the same account for mobile payments as for offline and online payments, notes Parechanian. Mobile payments and prepaid accounts will be a major strategic focus for AmEx over the next few years, she predicts.


Other American Express bulls figure the stock could trade as high as $75 to $80 a share over the next 18 months. It is currently trading at $58.38. Analysts' consensus earnings estimate for 2013 is $4.73 a share, but some more bullish watchers believe it's possible that profits could hit $5 a share that year, and go higher by 2014.   


Strong revenue and earnings growth should continue in the coming quarters, with improved credit quality providing "a tailwind for the stock," says Mark C. DeVries, analyst at Barclays Capital, who rates AmEx as overweight. At its current low price-to-earnings multiple (P/E), the stock is attractive, he adds.


"If billed business growth accelerates to 10% year-over-year (vs. 7% estimates), rewards expense remains flat, and other revenue grows 10%, we estimate AXP could earn $5 in 2013, pushing the stock up to $75 using a 15 times P/E," says DeVries.


Also a bull on AmEx, Robert Napoli of investment firm William Blair rates the stock as "outperform" and believes it could trade in a range of $65 to $80 over the next 18 months. That equates to a P/E multiple ranging from 12 to 15 times his earnings estimate for 2014 of $5.45 a share.


The lower end of the range suggests no major success on its growth initiatives and continuation of sluggish economic growth, he says. But the high end of the range "suggests accelerating success on growth initiatives that drive faster top-line growth," says Napoli.

(Microsoft owns and publishes Top Stocks, an MSN Money site.)

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.  







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