American Express (NYSE:AXP) has a strong and established business model which helped the company withstand the financial crisis of 2008. Although the stock took a dive in 2008, it has been trending higher since. While concerns over the potential fiscal cliff in the U.S. economy are looming over the financial industry as a whole, Amex seems undeterred.  We believe that the company’s strategy of targeting affluent customers as well as its closed loop network holds it in good stead going forward.
Our $62 price estimate for the company’s stock implies a premium of 10% to the current market price.
A Look At The Business Model
Unlike its peers, Visa (NYSE:V) and MasterCard (NYSE:MA), American Express issues its own cards through its bank subsidiaries, American Express Centurion Bank and American Express Bank, FSB (AEBFSB). The company generally issues cards to affluent customers – the average American Express household earns about $97,000 per year while the industry average is around $71,000. By issuing its own cards, it is also able to collect discount fees from merchants accepting American Express. In contrast, for Visa and MasterCard, it is the issuing bank which collects discount fees from merchants.
Having established a strong reputation and brand name, American Express promises to bring high spending customers to its merchants. The average card member spend per Amex card in the U.S. is more than $10,000. For Visa this figure is much lower, close to $1,000. To gauge the magnitude of this trend, we can look at the figures for spending in the U.S. Amex accounted for a quarter of the $2.05 trillion credit-card spending in the U.S. last year, despite having significantly fewer cards in force than either of the two aforementioned giants. 
By fulfilling its promise, American Express also charges higher discount fees from its merchants, the average discount rate in the last quarter was around 2.5% of the transaction amount involved, a rate it has maintained over the last few years. Banks issuing Visa and MasterCard generally charge less than 2%.
Transaction fees account for almost two-thirds of American Express’ net revenues. The company has been able to maintain a high growth rate in this stream. Key to this growth has been growth in total cards-in-force both in the U.S. and outside. In the first nine months of 2012, Amex reported a growth of nearly 10% in cards-in-force outside the U.S., coinciding with similar growth in billed business in the U.S. We currently forecast a steady increase in cards-in-force both in and outside the U.S. You can modify the interactive chart below to gauge the effect a change in forecast would have on our price estimate.
Interest income from customer loans is the second most important revenue stream for American Express, accounting for around 15% of the company’s revenues. One of the factors that helped American Express after the financial crisis was that customers started paying off their balances on time, out of fear of getting trapped in a financial mess. It must be emphasized here that American Express’ customers were generally well-to-do and mostly did not suffer as much as lower earning households might have. As a result, American Express has been able to maintain low delinquency (around 1%) and charge-off rates.
It is believed that the Obama administration will take strict steps, tightening spending in the U.S. This might help boost the already strong growth in loan balance that Amex has been able to maintain. Average loans increased by 4%, year-on-year, in the first nine months of the current year. We expect annual growth rate of around 5% in average loan balance in the U.S. in the coming years.Notes:
- American Express CEO Confident in Firm’s Ability to Withstand Fiscal Cliff, Fox Business, 4th December, 2012 [↩]
- AmEx Profit Meets Estimates as Card-Spending Growth Slows, Bloomberg Businessweek, 18th October, 2012 [↩]