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Investment Overview for American Express Company (NYSE:AXP)
American Express is a global financial services company, whose principal products and services include charge and credit payment card products along with travel-related services to consumers and businesses across the globe. It's the third largest player in card transaction volumes in the U.S. after Visa and MasterCard.
American Express has four business segments: U.S. Card Services, International Card Services, Global Network and Merchant Services, and Global Commercial Services.
- American Express Issued Cards-in-Use in U.S.:
The total number of American Express Issued Cards in use in U.S. has increased from 31.3 million in 2012 to 36.2 million in 2015, growing at a rate of 3.7% per year. Over the last two years of this period, the growth rate was 5.5%. If American Express can maintain this growth rate of 5.5% for the rest of our forecast period, there could be just under 15% upside to the Trefis valuation of American Express. However, if the number of issued cards in use declines by 3% over the period, there could be 10% downside to our target price for American Express.
- Third Party Issued American Express Cards In Use:
The total number of Third Party Issued American Express Cards in use has increased from 37.6 million in 2012 to 47.4 million in 2015, growing at a rate of 8.5% per year. If American Express can maintain this growth rate of 8.5% for the rest of our forecast period along with a 3% increase in Average spend per customer on third part issued American Express cards, there could be a 10% upside to our estimate for American Express. However, if the number of third party issued cards decline by 4% along with a 4% decline in average spend per customer using these cards, there could be a 10% downside to our price estimate.
The American Express Issued (proprietary) Cards command an average Discount Fee (commission charged to merchants as a percentage of dollar value of transaction) of about 2.48% compared to the industry average of 1.9% primarily on account of a higher income/spending cardmember base with an average spending per cardmember 2-4 times that of the competitors. This lets American Express charge higher Interchange rates (the portion of Discount Fee that goes to the Issuing Bank) since it brings higher spending customers to merchants. In order to maintain and attract high-income consumers, American Express offers greater promotions and membership rewards, which again are afforded only by the higher Interchange Rate. This is American Express' much-publicized ‘Spend-Centric Model’ wherein American Express stands to earn more per transaction (4-8 times per transaction compared to competition) leading to a higher proportion of Transaction Fees compared to competitors.
American Express’ crucial competitive advantage is its Closed-Loop Network, wherein it serves as the Issuing Bank, the Network Provider and also the Acquiring Bank in a proprietary card transaction. This not only lets American Express earn the entire Discount Fee on any transaction but also analyze the trends and spending patterns among the various segments of its cardmember base and provide targeted marketing, analytical and value-added services to the merchants in the process.
Below are some trends which could have a significant impact on American Express and the credit card industry in general:
Growth In Mobile Payments
Mobile phone payments are rapidly gaining popularity, coinciding with the surge in smartphone sales. An increasing number of smartphones manufactured now utilize near-field communication (NFC) chips, which facilitate mobile payments. Mobile payments stood at $450 billion in 2015 and is expected to reach $620 billion in 2016, as an increasing number of phones incorporate near-field communication (NFC) chips to facilitate mobile payments. Meanwhile, mobile payments in the U.S. are expected to grow from $8.7 billion in 2015 to $27 billion in 2016, with per user spend set to close to double from $376 in 2015 to $721 in 2016. Over the 2016-2019 period, the percentage of smartphone users making payments through mobile phones is expected to grow from 15.3% to 27.3%, with average spend per user growing from $721 to $3,017.
Greater use of credit and debit cards
Americans are the highest non-cash users. A research by MasterCard indicated that in 2014, non-cash penetration was around 44% of total Personal Consumption Expenditure. This indicates that consumers are spending a significant amount through cards rather than with either cash or checks. The trend is only expected to continue into the future. Outside of the U.S., non-cash penetration is much lower but the use of cards is expected to increase at a higher rate in emerging markets than the mature markets.
Growth in Online Shopping
Cards are a preferred mode of payment for online shopping. Online retail sales in the U.S. have been growing at a staggering rate over the past decade. The card transactions volumes have moved from predominantly travel sales (air tickets, car rentals and hotel reservations) to non-travel and entertainment (T&E) areas such as personal and home care products, electronics, books and clothing. Rising online sales are expected to benefit card transaction volumes.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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