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Five Reasons To Buy American Express Now
By Michael Brush
Exclusively for InvestorIdeas.com
February 08, 2007
The last time I stepped outside the micro cap focus of Insiders Corner to go with a credit card company that insiders were buying, it was MasterCard (MA) – and the stock went up 120% in seven months.
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So let’s try it again.
This time around I’m going with another classic name in the space: American Express (AXP).
Amex shares dipped sharply to around $58 from $62 last December for a number of reasons.
- The stock shot up in mid-December on takeover speculation, but no takeover materialized. So traders sold.
- Then stock weakened ahead of quarterly results on Jan. 22, perhaps because investors got wind of what was coming. Expenses were up more than expected, and average spending by U.S. cardholders was lower than it has been.
- Finance chief Gary Crittenden also offered a few words of caution in that conference call. He warned that expiring interest rate hedges might add to costs. And he cautioned that 2007 won’t bring the same gain that came in 2006 when U.S. bankruptcy laws were tightened up.
But during this pullback, insiders stepped up and purchased over $1 million worth of stock in late January in at around current prices ($58.50), and I would, too. I’m not predicting 100% plus gains in less than a year as with MasterCard. (You can find earlier references to MasterCard here: http://www.investorideas.com/insiderscorner/Articles/060806.asp, and here: http://www.investorideas.com/insiderscorner/Articles/091406.asp.)
But in the long run, Amex should be ok for the following reasons.
1. The virtuous circle. Amex cardholders spend several times what Visa or MasterCard holders spend. This has several benefits. First, Amex can charge higher fees of around 2.6% on average – much higher than what Visa and MasterCard charge. This means Amex can offer better rewards.
And when cardholders get more rewards, they spend a lot more with their Amex cards – usually about four or five times as much as people who are not in the rewards program. Here’s the virtuous circle: The higher spending supports that premium pricing which boost profits and gives Amex even more money to offer better rewards.
“This virtuous circle really does sustain the competitive advantage of the company,” said Crittenden at a recent conference. “Every year our average spend goes up relative to the people that we compete against.”
What’s more, the juicy rewards mean that customers pay faster because they don’t want to get booted out of the program.
2. The network. Amex has its own network, so it gets all the money in each transaction – it doesn’t have to share any.
3. The partnerships. Amex is offering co-branded cards that get processed through the Amex network. It has partnerships with MBNA, Citigroup (C) and the Industrial and Commercial Bank of China, China’s largest credit card issuer. “These arrangements will provide earnings growth with little invested capital -- a dream scenario, in our view,” says Morningstar analyst Ryan Batchelor.
4. Small business. Amex says only 15% of small business spending is done on plastic. “The opportunities to capture incremental spending on our network are thus considerable,” says Crittenden.
5. The givebacks to shareholder. The card company has an “explicit goal” of returning 65% of its free cash flows to shareholders through dividends and share repurchases. “And it has lived up to this promise over the past several years,” says Batchelor.
Batchelor was the same analyst who was bullish on MasterCard back when it first came public and it looked like a buy because insiders were purchasing so much stock. He knows the sector, and I’d go along with his take on Amex now. “American Express has a fantastic business model and is poised for continued success,” he says.
The bottom line: Amex won’t move as much as MasterCard. But the insider buying tells us it should do well. I’d be a buyer right here.
Disclaimer
At the time of publication, Michael Brush had long exposure to MasterCard. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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