An Overview of American Express And Our $96 Price Estimate

American Express (NYSE:AXP) is the third-largest player in card transaction volumes in the U.S. after Visa and MasterCard. AmEx processed just a tenth of market leader Visa’s transaction volume of around 60 billion worldwide, yet it earned a staggering $33 billion in gross revenues in 2013 compared to $25 billion for Visa  and MasterCard combined.

AmEx has four business segments: U.S. Card Services, International Card Services, Global Network and Merchant Services, and Global Commercial Services. In our model, we value the company using the Dividend Discount Model (DDM) and split its earnings into the following key divisions: Card Transaction & Execution fees; Interest from Credit Cards & Investments; Card Membership Fees; Credit Card Securitization & Publishing; and Travel Services.

We recently updated our model, and have a price estimate for the company’s stock of about $96, which is slightly above the current market price. Below we provide a brief overview of our analysis and model for the company. 

See our full analysis of American Express here

Business Model – Spend-Centric Strategy

AmEx functions in a closed-loop network, wherein it serves as the issuing bank, the network provider and also the acquiring bank in a proprietary card transaction. Additionally, it has a spend-centric business strategy, focusing on how much customers spend in a transaction. Both its target customers and the corresponding fee charged are in the premium segment of the market. AmEx’s key customer base includes members from households earning upwards of $95,000 per year. This also enables AmEx to market itself as a premium and a valuable brand. ^[1]

Following such a business strategy helped AmEx withstand the negative impact from the 2008 economic recession, and differentiates it from major competitors such as Visa and MasterCard.

Divisions in Brief

Card Transaction & Execution Fees

The division contributes nearly three-quarters (74%) of the company’s value according to our estimates, generating revenues totaling over $21 billion in 2013, up 40% from 2010. On account of the spend-centric strategy, AmEx earns a relatively higher proportion of its total revenues from transaction fees – nearly 65%.

The transaction fees, or discount fees, are the commissions charged to merchants as a percentage of the dollar value of transactions using AmEx-issued cards. Transaction fees are generally split three ways:

• Acquiring Bank of the Merchant – processes the credit card transaction for the merchant.
• Interchange Rate – paid to the issuing bank for lending credit and undertaking the associated risk.
• Network Services Provider Fees – to compensate for the costs associated with maintaining the communication systems, databases and servers that are used in processing a card transaction.

The average discount fee charged in the U.S. is around 1.9%, but AmEx charges a higher rate in the range of 2.5-2.6% on the back of its high spending members. AmEx cardholders on average spend around $150 per transaction, while for market leader Visa the dollar volume per transaction is just $50. The annual spend per cardholder was just under $16,000 in 2013, and is expected to rise above $20,000 mark through the end of the decade, given the improving consumer spending environment.

Interest From Credit Cards And Investments

AmEx earns interest income on the credit it extends to card members as well as the un-loaned cash it puts in bank deposits and invests in securities. As of 2013, interest income from the U.S. & non-U.S. credit card operations was in excess of $5 billion.

AmEx is capitalizing on its strong market position and increasing the acceptance of AmEx cards at a greater number of retailers. Current trends indicate a consistent growth in average loan balance per AmEx cardmember in the U.S., expected to cross the $2,000 level during the forecast period. Since these loans fetch higher interest rates than other sources, the associated income is likely to witness significant growth going forward.

This division contributes 10% to the overall stock price according to Trefis estimates.

Card Membership Fees

This is the annual membership fee that AmEx charges its card members depending upon the card type. The division accounts for 8% of our price estimate, contributing $2.6 billion in revenues in 2013.

In its pursuit to increase its customer base by offering newer products to comparatively lower income groups, AmEx may offer reduced membership fees. We expect the fees to increase more slowly than what was observed in 2010 (7.7%)  and 2011 (3.9%) throughout the remainder of the decade.

Other Businesses

Nearly 5% of the total stock price contribution comes from Credit Card Securitization and Publishing. AmEx partly finances its credit card loans and charge card receivables by selling asset (loan receivables) backed securities. Additionally, AmEx maintains partnerships with publishers like Time Inc. and SkyGuide, and generates advertising revenues from these publications.

Lastly, Travel Services contributes just over 4% of the company’s value. AmEx generates revenues in this division by charging consumers a commission on the value of travel sales, generating around $1.9 billion revenues in 2013. With the economy on a gradual recovery in the U.S. and globally, travel sales are expected to pick up.

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1. SEC 10K filing [↩]