Visa Inc (V), Mastercard Inc (MA) & American Express Company (AXP): Are Credit Card Companies Getting Too Rosy?

American Express Company (NYSE:AXP) is slightly different from Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA). American Express focuses on the higher end of the market and has fallowed a vertically integrated model. The company retains customer debt on its balance sheet like a bank.

American Express Company (NYSE:AXP)’ focus on the higher end of the market helps to remove itself from main street’s woes. In Q1 2013, its net write off rate of 1.9% was significantly lower than many major banks. Bank of America net write off rate was 4.2% and Capital One’s rate was 4.5%. This focus on the upper end of the market is a wise decision and will help American Express Company (NYSE:AXP) to grow even as America’s middle class suffers from low wage growth.

The company’s revenue growth has been falling, and it deserves its valuation discount relative to Visa and MasterCard. American Express’ profit margin of 13.2% and earnings before interest rate and taxes margin of 25.7% are good enough, and it recently boosted its dividend to $0.23 per quarter.

Conclusion

Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) are facing a number of challenges. Some of the world’s best funded retailers are trying to craft their own increased settlements related to credit card companies’ earlier monopolistic behavior. Visa and MasterCard continue to grow in the emerging markets, but over all their growth is steady or falling. Against this backdrop their increasing forward P/E ratios above 22 are unnerving.

American Express Company (NYSE:AXP) isn’t growing as quickly as Visa Inc (NYSE:V) or Mastercard Inc (NYSE:MA), but it is growing and comes at a much more reasonable valuation. Also, American Express’ focus on the higher end of the market will help to insulate it from the middle class’ challenges. At current prices following Warren Buffet into this company is very attractive.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends American Express Company (NYSE:AXP), MasterCard, and Visa. The Motley Fool owns shares of Mastercard Inc (NYSE:MA).

The article Are Credit Card Companies Getting Too Rosy? originally appeared on Fool.com.

Joshua 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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