In the developed markets, consumers will start using cards more often as the eurozone has just emerged from an 18-month long recession and the U.S. sees its unemployment (ever so slowly) creep toward full employment (5%-6%).
The card of the rich
Economists often look at sales from Wal-Mart to see how the ordinary consumer is holding up, and they look at American Express Company (NYSE:AXP) to see how the wealthier consumers are doing.
American Express Company (NYSE:AXP) is benefiting from a growing credit portfolio, as its credit card portfolio rose to $54.6 billion in July from $54.4 billion in June. This means its credit card balance is up 3.8% year over year and is currently growing at a 4.4% annualized rate.
A bigger credit card balance sheet means that they have more money they can charge interest on, which boosts the bottom line. While consumers as a whole have gone through a massive deleveraging process since 2008 (which is a very good thing for the U.S. economy), it looks like some of them may be ready to start borrowing again.
One thing you have to worry about is credit card delinquencies, because an increase in delinquencies eats into profits and erodes the stock price. American Express Company (NYSE:AXP), due in part to its wealthier customer base, is able to keep its delinquency rate low. In July, it was down to 1.88% from 2.04% in June.
Credit card balances tend to go down as consumers pay off last year’s debt. Going forward, American Express Company (NYSE:AXP) has the holiday season to boost growth as consumers ramp up spending once again. American Express will also be able to ride the shift to plastic in the U.S. if the Nilson Report is right and the amount of retail purchases rises.
A growing balance sheet before the holiday season coupled with a sub-2% delinquency rate could propel American Express Company (NYSE:AXP)’ earnings in the next six months. In the long term, American Express will be able to ride the continued switch to plastic in the U.S., which will make its balance sheet bigger, earning it more interest and boosting the bottom line.
All of that to say
The growth runway for plastic is huge, especially in emerging markets as they enter the 21st century. MasterCard and Visa have positioned themselves to capitalize on this growth and the continued switch to plastic in developed markets. Both companies offer great long-term growth prospects. American Express Company (NYSE:AXP) is also well-positioned for the continued shift to plastic in the U.S.
The article 3 Companies Profiting From the Swipe originally appeared on Fool.com is written by Callum Turcan.
Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard and Visa.
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