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.