American Express Is Good For $60 Despite The Macro Uncertainty

American Express (NYSE:AXP) is well known for the successful adaptation of its spend-centric model,  charging higher transaction fees from merchants and in return bringing them affluent customers who are willing to spend more. Customers are attracted by the company’s lucrative offers and reward programs and effective marketing strategy. ^[1]

Unlike competitors, MasterCard (NYSE:MA) and Visa (NYSE:V), who focus on volumes of cards issued and work on a lend-based strategy, which is susceptible to a stagnancy in case a customer hits his or her credit limit, American Express focuses on spend potential of higher income groups, with higher spending and fees per card. This gives Amex an advantage in revenue generation and helped the company remain profitable through the economic recession observed world-wide in 2008. ^[2]

See our complete analysis of AmEx’s stock here

Effective Strategy

Along with the spend-centric strategy, American Express maintains a Closed-Loop Network, whereby, it issues its own cards and acts as the network provider as well as acquiring bank, and is thus able to the entire discount fee charged to merchants. The interchange fees charged by Amex are about 0.77% higher than those charged by Visa or MasterCard, on average, American Express charges 4.2% for a $30 tank of gasoline in the U.S., whereas Visa would charge 2.3% and MasterCard 1.9%. ^[3] This allows the company to generate higher profit per transaction.

Amex cards are also issued to customers with higher income than Visa or MasterCard, the average American Express household earns about $97,000 per year, where as the industry average is $71,000. ^[4]

Billings on American Express cards increased by 10% in April and May and we expect card member spend on Amex-issued cards to continue to grow through our forecast period. ^[5]

Sustained Growth

Even as Europe grows through a period of economic uncertainty with a bailout looking imminent in Spain and Greek elections and future as part of the European Union in question, American Express remains unaffected by the market uncertainty and continues to perform strongly in the region as the company’s European billed business grew by 5% in the last two months and it maintains a positive outlook for the region.

The closed-loop network adopted by American Express also allows it to analyze spending patterns and trends observed among its customer base, thus enabling it to make effective market strategies and innovative products and offers to attract and retain customers.

The company recently announced a rewards program in collaboration with Zynga (NASDAQ:ZNGA) (See American Express And Zynga Promote Prepaid Cards Linked To Virtual Cash) and has also launched My Offers on Apple’s (NASDAQ:AAPL) iPhone to allow small businesses to create and share offers to attract consumers. ^[6] Amex reported industry low delinquency rates 1.2% in May and we expect it maintain its yield % from credit card loans in the U.S. through the next few years.

We currently estimate a price of $60, 10% above the current market price. You can gauge the impact of a change in our forecast by modifying the charts above.

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1. American Express’ Spend-Centric Model, Payment News [↩]
2. 5 Recession Stock Picks And What They’re Worth Now, March 08, 2011 [↩]
3. American Express Credit Card, The True Cost of Credit [↩]
4. Spending by affluent helps Amex to strong quarter, Yahoo News, April 18^th, 2012 [↩]
5. American Express Says Spending Growth Dips, The Wall Street Journal, June 13^th, 2012 [↩]
6. American Express Launches Deals Program for Small Retailers, Inc. Wire, May 15^th, 2012 [↩]