The limits of the unlimited card
American Express Company (NYSE:AXP) is also among the most famous credit card brands in the world. It has dug an economic moat for itself on the back of outstanding rewards and services. These features have attracted big-spending cardholders who, in turn, have allured many merchants, even in spite of the firm’s higher fees, which then serve to fund the firm’s reward program while still generating good margins (Morningstar).
Unlike its two competitors above, American Express Company (NYSE:AXP) doesn’t only offer transaction processing services, but also issues its own cards. This provides both higher margins and a massive source of information concerning consumer tastes and trends. Over the past few years, the firm has decided to monetize this knowledge, and early results look quite promising, portraying a growth outlook for the upcoming years. American Express Company (NYSE:AXP)’s efforts to penetrate lower-end markets and mobile payments segments might provide plenty of upside, too.
Trading at 18 times its earnings, valued the lowest of the three companies in this article, I would still recommend holding onto this stock for now. Its lower valuation reflects lesser growth prospects for the years ahead. Analysts expect American Express Company (NYSE:AXP) to deliver a 12% annual EPS growth rate over the next five years, under-performing the industry and its main rivals, Visa and Mastercard. Concerns about the future are many, from increased competition in the premium segment to a deterioration of the firm’s brand name due to its incursion in lower-end market sectors. In addition, the firm’s interest yields are expected to remain sluggish for some time, while volatility in overseas markets, which represents an important part of the company’s revenue, provides more reasons to feel doubtful about future performance.
Bottom line
Credit card companies make money by giving users “money” in advance, funding their purchases. Why not invert this trend? Financing credit card companies by purchasing their stock can deliver plenty of upside for investors – it’s just a matter of choosing the right firm. From my point of view, Visa Inc (NYSE:V) leads the bunch, followed closely by Mastercard Inc (NYSE:MA). Despite their above-average valuations, their above-average growth potentials make them “buy and hold” cases.
The article Who Is the Leader in the Credit Card Industry? originally appeared on Fool.com and is written by Damian Illia.
Damian Illia has no position in any stocks mentioned. The Motley Fool recommends American Express Company (NYSE:AXP), MasterCard, and Visa Inc (NYSE:V). The Motley Fool owns shares of Mastercard Inc (NYSE:MA). Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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