American Express Company (AXP): This Credit Card and Travel Company Still Has Growing To Do

Still cheap

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.

Summary

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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