With the strong gains in financials so far this year, it may seem like the sector may be running out of gas. While this may be true for some companies, there are still bright spots to be found, and the truth is that the financial sector is still one of the cheapest in the market. One of my favorite companies in the space, and one that I still believe to be grossly undervalued, is American Express Company (NYSE:AXP), which I believe still has tremendous upside potential even after a gain of almost 30% so far this year. Just how much further could it go, and can the same be said for its competitors?
About American Express
One of the leading global payments and travel services companies, American Express Company (NYSE:AXP) offers its services to businesses and individuals all over the world. Its business is divided into four main segments.
U.S Card Services is the largest segment, and is responsible for just over half of the company’s revenues. This segment includes the U.S. consumer card business, the well-known Travelers Cheques business, the prepaid card business, and the travel network. International card services accounts for 17% of the company’s revenue and is made up of the cards issued to customers outside of the U.S. Global Network & Merchant Services (also 17% of revenues) deals with the company’s relationship with third-party issuers of American Express Company (NYSE:AXP) cards as well as the company’s relationship with merchants that accept American Express Cards. Finally, Global Commercial Services is the smallest segment at 15% of revenues and includes corporate American Express cards, corporate purchasing accounts, ePayment systems, and the American Express Business Travel activities.
Recent developments should lead to tremendous revenue growth
From a quick glance at the numbers above, one area where there is certainly room for growth is international. If 68% of the company’s revenue comes from both U.S. and international card services, a quick calculation reveals that 75% of the company’s card-related revenue is domestic.
Recently, the company has begun a few initiatives geared toward growing its domestic business. Last October, the company started a joint venture with Wal-Mart Stores, Inc. (NYSE:WMT), which created the prepaid “Bluebird” card. With the vast amount of consumers who shop at Wal-Mart, this venture should benefit both companies’ bottom lines. Consumers can add funds to their card via direct deposit, or by simply handing money to Wal-Mart Stores, Inc. (NYSE:WMT) cashiers, and is being marketed as an alternative to checking accounts and traditional debit cards.
Also, in March 2013 the company launched a “pay by tweet” joint venture with Twitter, which provides consumers with the opportunity to buy certain products by tweeting purchase hashtags. The company is using the service similar to a Groupon, where participating merchants offer a limited number of discounted products – such as an Amazon Kindle Fire HD for $149 – and works by synching a customer’s Amex account with their Twitter. American Express Company (NYSE:AXP) itself was among the first to offer a great deal, a $25 Amex gift card for $15. This service is available on a limited basis for now and has tons of room to grow.
At just 15.5 times current fiscal year earnings, Amex is very cheap considering its aggressive growth initiatives and the strong credit quality of its customer base. The company is projected to earn $4.79 per share this year, rising to $5.26 and $5.85 in 2014 and 2015, respectively, as the new ventures expand and become more lucrative. This corresponds to a three-year average annual forward earnings growth rate of 10%, which should increase as consumer spending rises as well.
Alternatives: Capital One and Discover
Capital One Financial Corp. (NYSE:COF) is also a card issuer, but has a much more diverse portfolio of loans than American Express Company (NYSE:AXP). In addition to credit card receivables (which make up 41% of the company’s loan balances), Capital One also has home loans, auto loans, and retail banking loans. Having recently acquired the U.S. business of ING Direct, Capital One Financial Corp. (NYSE:COF) is now the sixth largest depository institution in the U.S. Shares trade for a very low P/E multiple of just 9.4 times this year’s earnings. However, the projected forward growth is less than stellar, at around 6% annually. Still, at this valuation it looks like a pretty attractive entry point.
Discover Financial Services (NYSE:DFS) offers credit cards, personal loans, and payment processing services. One aspect of Discover that I’m particularly optimistic about is the company’s partnership with PayPal (owned by eBay) that will provide a mobile wallet to PayPal customers that uses Discover’s payment processing network. Discover Financial Services (NYSE:DFS) trades for 10 times 2013’s earnings, and I view the projected 7% forward growth rate as conservative.
There are several bargains to be had in the payment processing and credit card space, but I particularly like the direction American Express Company (NYSE:AXP) is heading with their business. I’m especially excited to see how their partnership with Twitter works out, and at the current valuation, now is a good time to get in on the action.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends American Express. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Credit Card and Travel Company Still Has Growing To Do originally appeared on Fool.com and is written by Matthew Frankel.
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