American Express (NYSE:AXP) is scheduled to report earnings for the fourth quarter of 2013 on Thursday, January 16.  We expect strong results from the credit card company helped by better-than-anticipated holiday season sales in the U.S. Despite mitigating factors like unfavorable weather conditions, which led to a 15% decline in customer traffic through November and December, research group ShopperTrak reported a 2.7% increase in 2013 U.S. holiday season retail sales. 
American Express earns 60% of its revenue from transaction fees charged to merchants on the basis of the volume of transactions processed. More than half of AmEx’s transaction volume comes from the U.S., underlining the importance of the market for the company. American Express reported an 8% increase in spend per card-member for the third quarter while total cards in force in the U.S. grew 4%.
Our $77 price estimate for the company’s stock is at a discount of 10% to the current market price.
Spend Centric Model Should Help American Express
American Express is well known for its spend centric model. The company offers rewards and discounts to high-spending customers who are usually relatively affluent. The average American Express household earns about $97,000 per year.  Payment volume per transaction is around $150 for American Express cards, much higher than the average of $55 for competitors like Visa (NYSE:V), MasterCard (NYSE:MA) and Discover Financial (NYSE:DFS). This model helped the company through the financial crisis and should hold it in good stead going forward. We believe AmEx’s business strategy will help it gain from the U.S. retail growth through the holiday season.
Online Sales Are Strong
Data released by the U.S. Department of Commerce also suggests that the continued economic recovery has benefited sales. Personal consumption expenditures were up 3% year-on-year through October and November following a 3% increase in disposable personal income through the third quarter.  Consumers are also more inclined to spend; personal saving as a percentage of disposable personal income has gone down from 6.6% in the fourth quarter of 2012 to 4.9%. 
E-commerce was the biggest driver for holiday season sales as consumers preferred to shop from their homes rather than brave the weather outside. Amazon (NASDAQ:AMZN) announced a record holiday season for its annual membership program, Amazon Prime.  The online retailer reported more than 426-items were sold per second through Cyber Monday as more than 1 million customers registered from the company’s services in December. Strong online sales portend good results for card companies like American Express, Discover, Visa and MasterCard as their cards are widely used for online transactions.
Third-Party Growth Outside The U.S.
Although American Express has successfully implemented a closed loop network in the U.S., it is employing a third-party model for growth outside. Almost 80% of the American Express branded cards issued outside the U.S. in 2012 were issued by third party financial institutions through the Global Network & Merchant Services (GNS) division. American Express invites established financial institutions to issue cards carrying the signature American Express logo and also to act as merchant acquirers on the AmEx network, thereby leveraging the network of these companies’ to enhance its global presence. During the last quarter, American Express’ international propriety cards in force remained unchanged while third-party cards-in-force increased 6% to 39.4 million. We expect further growth in this segment through the fourth quarter of 2013 and in the coming years.Notes:
- Investor Presentations Upcoming Events, Investor Relations [↩]
- U.S. Holiday Sales Gain Is Smallest Since 2009, ShopperTrak Says, Bloomberg, January 8, 2014 [↩]
- Spending by affluent helps Amex to strong quarter, Yahoo News, April 18th, 2012 [↩]
- Table 2.8.6. Real Personal Consumption Expenditures by Major Type of Product, Monthly, Chained Dollars (M) [↩]
- Table 2.1. Personal Income and Its Disposition (A) (Q) [↩]
- Record-Setting Holiday Season for Amazon Prime, Press Release, Amazon [↩]