American Express: Superb growth drivers
Although many doubted that American Express Company (NYSE:AXP) could deliver strong results, the earnings report for Q1 2013 proved them wrong; the company reported 7% growth in quarterly EPS (year over year) and 23% return on equity, a rate higher than 90% of the 34 companies that provide Credit Services in the U.S. and the 68 firms doing this globally.
Two main drivers of this success can be highlighted: the growth in net income, from previous quarter’s $637 million to $1.3 billion in the quarter, and the decline in shares outstanding, from 1.141 billion in 2012´s last quarter to the current 1.106 billion.
Another of American Express Company (NYSE:AXP)’ growth drivers is its high-spending customer (or cardholder) base, which has encouraged many businesses to pay American Express Company (NYSE:AXP) higher transaction fees. To push this advantage even further, the company is now trying to allure a wider cardholder base with the introduction of the Serve and Bluebird initiatives, both offering a prepaid card service and some other basic features.
Despite these encouraging signals, some concerns like the stock price of $67.24 being close to its 10 year high of $67.46 and the dividend yield (1.2%) being close to a three year low, divide opinions. While Ken Fisher bought over 10 million shares in Q1 2013, adding 19.94% to his stake in the company, The Yacktman Fund and Focused Fund sold out.
Even though the company´s share price has been rising for three years now, Zacks´ performance calculations are also conservative, projecting an upside of approximately 4.5% within the next 12 months.
MasterCard: A huge moat in the payments industry
Opinion on Mastercard Inc (NYSE:MA) is strongly divided. While some analysts, like Zacks, advise to sell the stock, others, like Barrons, recommend buying. We shall see the reasons that would lead one to buy or sell in order to make an informed decision.
Zacks estimates a neutral stock performance, fixing a target price of $553 by March 2014, and recommends selling, mainly due to increasing operating expenses and several lawsuits faced by the company that could result in losses.
However, many other analysts advocate buying Mastercard Inc (NYSE:MA). Understanding the reasons is not very difficult, given the company’s exceptional financial strength driven by its freedom from debt. In addition to this, several other ratios back the company’s expected performance: operating margin (53.3%), net margin (37.3%), and return on assets (22.1%) are at the highest in the firm’s history, while return on interest (39.9%) and revenue growth (10.8%) are considerably close to historical highs.
Also to be taken into account is the P/E ratio of 23.6. Currently trading at a higher multiple than most of its peers, it reflects better prospects for future EPS growth. Mastercard Inc (NYSE:MA)´s trailing P/E ratio is still one of the lowest in the firm´s history, trading at less than 1/6 of the pre-crisis ratio.
Even better is the forward P/E, which is projected at 17x, implying an EPS growth of approximately 39%. Tom Russo seems to acknowledge this as he expanded his position in MasterCard by 6%, buying 943,961 shares.
Is this the real leader ?
Although Visa Inc (NYSE:V) shows some features similar to Mastercard Inc (NYSE:MA), like the absence of debt, the outlook is not as promising.
On the positive side, Visa Inc (NYSE:V)´s Q1 surpassed expectations, posting EPS of $1.82, up from previous quarter´s $1.49, mainly due to a diminishing number of shares. The development of electronic payment methods places the company in a good position to seize opportunities for further expansion, helping it maintain the uptrend in transaction and payment volumes, both in the U.S. and overseas markets.
In addition, several acquisitions, including CyberSource, PlaySpan, and Fundamo, among others, widen Visa Inc (NYSE:V)’s product offerings and exposure to diverse high growth sectors like eCommerce and Mobile Commerce. Moreover, its strong cash position (about $1.3 billion in cash and cash-equivalents and no long-term debt) provides plenty of room for further purchases and consequent inorganic growth.
On the other hand, price is not convincing. A price close to its highest in 10 years, and P/B and P/S ratios of 4.77 and 12.37, respectively, are also quite discouraging. Also concerning is the divergence in cash flow from net income.
Pressure due to increasing regulation of the payment industry should be taken into account too, especially in some of Visa Inc (NYSE:V)’s key markets like China, Brazil, Canada, Australia, and the U.A.E.
Bottom line
Within the payment industry, risk cannot be avoided. However, looking at the companies’ fundamentals can help reduce risk. While all of the above analyzed enterprises offer some upside, the outlook is more promising for Mastercard Inc (NYSE:MA) than for its peers. Maybe, it’s a good idea to follow Tom Russo into this one.
The article Which of These 3 Leading Companies Should You Buy originally appeared on Fool.com and is written by Victor Selva.
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