American Express Company (NYSE:AXP) reported a fairly solid quarter, although the results weren’t anything spectacular as the company beat analyst estimates slightly. Analysts were anticipating earnings to come in at around $1.12 per share, with American Express reporting earnings at $1.15 per share, the quarter was a success, but only by a slight margin.
Analysts weren’t impressed by the revenue American Express reported. The revenue was negatively affected by currency adjustments. American Express Company (NYSE:AXP)’ historical five-year growth rate is 25%, with analysts on a consensus basis anticipating growth at around 12% on average for the next five years.
The highlights of the earnings
American Express Company (NYSE:AXP) reported declining growth. Looking closely at the image below, this may be ominous for other credit and debit card companies in the space (Visa Inc (NYSE:V), and Mastercard Inc (NYSE:MA)).
Source: American Express
American Express indicated that it grew total revenue by 5% over the prior year. But in 2011, the company was able to grow revenue by 9% over the prior year. The return on equity in 2011 was 28%, but it declined to 23% in 2012. This decline in return on equity implies a declining ROI from invested capital. American Express Company (NYSE:AXP) grew earnings per share by 8% over the previous year (which is good, but there are certainly better opportunities in the stock market).
Peers may be impacted
Analysts, on a consensus basis, anticipate Visa Inc (NYSE:V) to generate EPS growth of 18.40% in the current fiscal year. Visa trades at a P/E multiple of 47. It is the dominant player in the merchant services space, which is why investors are willing to pay a premium for the company’s growth.
Visa was the first merchant services provider in the world, and it is likely that Visa Inc (NYSE:V) will be able to maintain its competitive edge against American Express Company (NYSE:AXP) and Mastercard Inc (NYSE:MA). Visa’s distribution channel, along with market acceptance, is formidable. It is likely that Visa will continue to grow at a faster rate than American Express in overseas markets.
The key take-away is foreign exchange effects. American Express Company (NYSE:AXP) could have reported a 5% growth in revenue rather than a 4% growth in revenue, had the Dollar remained stable against a basket of currencies over the past quarter. The Power Share DB US Dollar Index Fund has rallied 4.5% since January. This translates into lower revenue and profit recognition as profit is recognized in U.S. Dollars.