TOP CONTRIBUTORS

Taishi Kushiro

Sean Hinton

Thomas Shyr

AXP AT A GLANCE

P/E ► 12.4 AVG EV/EBITDA ► 15.2 AVG ROA ► 4.2% AVG ROE ► 15.7% AVG Debt to Equity ► 6.68 AVG Current Ratio ► 0   Interest Coverage Ratio ► 1.83 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginEbitIncome Before TaxesNet Income from Continuing OpsInterest CoverageOperating Expenses

For the first time, U.S. consumers spent more using their credit cards than with either checks or cash in 2006. The American Express Company (NYSE: AXP), a global financial services institution whose main offerings are charge and credit cards, is clearly a beneficiary of this shift. The company earned over $31 billion in revenue in 2007 from its $647 billion in total customer transactions. On November 10, 2008, American Express was approved by the US Federal Reserve to become a bank holding company making it eligible for a part of Troubled Assets Relief Program (TARP)'s $700 billion in recovery funds,^[1] and on November 12, 2008, it requested a $3.5B capital infusion from the US Government.^[2]

American Express earns about half of its revenue from merchants, charging them a discount rate for each transaction processed. The other major source of revenue is cardholders themselves, who pay annual fees and interest charges on balances. Because AmEx is one of the leading issuers of corporate credit cards, its customers on average, spend up to 2-4 times as much as its competitors'; in 2007, the average AmEx cardholder spent $12,106 per year, not including cards issued by affiliates. This allows American Express to charge a discount rate over twice as high as either of its main competitors (an average of 2.56% in 2007). This combination of higher discount rates and big-spending cardholders means that American Express earns much more per swipe than either Visa (V) or Mastercard (MA).

As a credit card issuer, American Express's performance can be highly dependent on the overall state of the economy. During economic downturns, consumer spending drops, while booms can stimulate spending and borrowing. With the falling U.S. home prices, tightening credit markets, and the general economic uncertainty caused by the subprime lending fiasco, credit card issuers like American Express are being faced with declining consumer spending as well as the increased likelihood that some customers will be unable to repay their balances. Additionally, interest rate cuts could pressure lenders like AmEx to lower the rates they charge on balances, further hurting earnings.

[edit] Company Overview

American Express Company began in 1850 as a successful express delivery business. While the company did not provide financial services, it delivered small parcels including stock certificates, currency, and certain financial instruments for large banks in New York. By 1905, the U.S. Immigration Department awarded a currency exchange service contract to American Express. As WWI dawned, American Express successfully cashed all travelers cheques and money orders in full, enabling thousands to come quickly come home. Within a decade, American Express also entered the traveling business by providing tours around Europe and a four month around-the-world cruise voyage.

[edit] How the Company Makes Money

In 2007, American Express generated $31 billion in revenue from the following sources:

• Discount Revenue accounted for 53% of all revenue for American Express in 2007. The company receives a portion of every transaction charged to its credit and charge cards. This fee is assessed to merchants' respective businesses.

• Cardmember Lending Financing the second largest revenue center for American Express. While the company is traditionally known for its charge cards, the balance of which needs to be paid in full every month, American Express has introduced an increasing number of traditional credit cards with revolving balances.

• Card Fees come from annual memberships, foreign exchange conversion fees, and service fees.

• Other revenues include various fees--including commissions from partners--as well as fees from its travel business. The company also makes money off of net interest income, which is derived from the difference of the company's interest expense compared to financing revenue.

[edit] Products/Services

[edit] U.S. Card Services

U.S. Card Services brought in over half of American Express's revenue and around 45% of its net income in 2007. This division's products include their branded cards as well as several niche charge and credit cards (e.g., student, travel rewards).

• Charge Cards includes Green, Gold, Platinum, and Centurion cards. Charge cards operate like credit cards, with the exception that cardholders must pay outstanding balances in full every month.
• Credit Cards are different from charge cards in that customers are allowed to carry a balance. American Express makes money from financing charges for accrued balances.
• Travelers Check and Card are used by travelers because of its loss protection. American Express offers pre-paid card version of this product as well.
• Travel Services provide Card members and non-members with travel options including flight schedules, car rentals, and hotel bookings.
• Small Business OPEN allows small businesses to manage expenses, budget for travel and gain rewards through targeted credit and charge cards as well as tools. American Express is the leader in this niche.

The company spun off its investment brokerage arm (American Express Financial Advisors) into Ameriprise Financial Inc. in 2005. The spin off gives the investment brokerage the capability to react quickly to market changes. Ameriprise Financial, Inc. (AMP), with $400 billion in assets under management, has seen its stock price rise almost 50% since 2005.

[edit] International Card & Global Commercial Services [GCS]

The GCS branch of American Express provides expense management services to firms worldwide. Products offerings include corporate cards provided to a company's employees and corporate purchasing solutions for items such as office supplies. American Express also focuses on business travel planning and expense management.

[edit] Global Network & Merchant Services [GNS]

The GNS business operates a business that signs merchants to accept American Express cards and processes card transactions for those merchants. In 2004, American Express successfully sued Visa and MasterCard on anti-trust grounds to allow U.S. banks to issue American Express cards. This business segments oversees the charge and credit card network that includes both proprietary cards and those licensed under partnership agreements.

In order to secure partnerships with merchants, GNS also provides partner financial institutions and merchants with services such as back-office products and marketing programs.

[edit] Corporate and Other Segments

This segment of American Express has limited impact on revenues and acts more as a complementary segment that aids and increases the image of the rest of the corporation. Products includes magazines, guides and travel-related websites.

[edit] Trends and Forces

[edit] Impact of credit card reform bill

On May 22, 2009, President Obama signed into law a wide ranging credit card reform bill set to take effect beginning in February 2010.^[5] Included in this bill are restrictions on interest rate increases, a 45 day notice before changing interest rates, restrictions on fees that can be charged, requirements for more disclosure, and limits on ability of those under the age of 21 to obtain cards, among others.^[6] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.^[7] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.

[edit] Consumer Payment Means

In 2006, for the first time, U.S. consumers used credit cards to pay for more purchases than cash or checks, a trend that continued into 2007. In addition to credit cards, debit cards and electronic payments (like PayPal) have taken market share away from more traditional means of payment. It should be noted that debit cards have doubled in usage over the past six years, but American Express does not provide debit card products.

One particular technology driving increased usage of credit cards is contact-less payments which do not require a swiping through a machine. American Express entered the contact-less market through its ExpressPay service. The company estimates that ExpressPay not only shortens the length of time for a transaction but also increases average transaction size by 20-30% compared to cash spending--both attractive for merchants using this system.

• One of the primary participants within the contact-less payment sector is MasterCard's PayPass, which is currently accepted in major businesses such as McDonald's (MCD) and CVS (CVS).
• An interesting phenomenon in the electronic payments industry is payments using cell phones, which is popular in Asia, particularly Hong Kong and Tokyo, as well as parts of Europe.

[edit] Partnerships with Banks

Mastercard (MA) and Visa have grown to their current scale in large part by having banks issue their credit cards as members of their respective associations. In 2004, American Express also joined this fray when courts ruled that competitors Visa and MasterCard had unlawfully prevented its member banks from issuing American Express cards.

The GNS segment has grown at a rapid rate from the standpoint of cards in force (CIF) and dollar transaction volumes. CIF is the number of American Express cards issued (including supplements), which has grown over 30% annually since 2004. Total transaction volumes increased at an even faster rate (46% per year). On the other hand, the other two company segments' combined CIF growth was under 6% and transactions growth was about 14%.

Partnerships with banks may continue to be a strong growth area for American Express, but it may dilute the company's prized brand name though the dissemination of co-branded cards. Based on calculations from their annual report, these cardholders spend about 4-5 times less on their cards compared to proprietary American Express cards.

[edit] Closed Loop Merchant Network

A charge and credit card company is only as good as the merchant network that accepts its cards--after all, a customer cannot make a charge unless the card is accepted. One of American Express' primary competitive advantages is its closed loop network, meaning that it acquires both cardholders as well as merchants into its network. This allows the company to have a deep understanding of how its cardholders charge purchases. Merchants are attracted to the American Express network because of the company's wealthier demographic.

The net effect of this closed loop network is an average cardmember spending 2-4 times higher than competitors, as well as a merchant discount rate twice as high as its competitors. All in, American Express makes 4-8 times as much discount revenue from a typical cardholder compared to either Visa or MasterCard.

The company estimates that its network accommodates approximately 80-90% of the general transactions its customers make in a given year. As such, American Express has shifted away from its legacy of travel and entertainment--which used to drive two-thirds of all transactions in 1990--to general retail and other sections, which currently generates the majority of all charges from its cardholders.

[edit] Building Customer Loyalty Through Rewards

American Express can fundamentally grow its charge and credit card businesses by issuing more cards or accruing higher spending per card (or both). As mentioned earlier, the company has expanded the number of cards issued through partnerships with banks.

A key lever for the company to gain higher spending on its cards, or increasing the "share of wallet", is with its rewards program. Recently, the American Express has focused on driving "everyday purchases" such as grocery, gas, and drug store transactions to their card by offering 2 points for every $1 in spend (1:1 ratio is typical). Membership Rewards is a 16 year old program that has yielded some of the highest returns in the business (see below). Cardholders have used points to redeem for items such as everyday shopping as well as high end luxury automobiles and private jet timeshares, demonstrating the loyalty American Express has built.

• The "everyday spending" categories now account for 65% of transactions--up from under 10% five years ago.
• Though the growth of this program has increased expenses at a fast clip (28% every year since 2002), the revenue growth far exceeds the costs; its return on equity is the highest of its competitors by a wide margin. American Express spends about 60% of all marketing and promotional expenses on its rewards programs.

[edit] Competition

[edit] Networks

American Express' main competitors include Visa and Mastercard (MA), each of which owns a merchant network and issues the majority of their cards through banks and other partners:

While American Express trails its competitors from a charge volume perspective, it leads on several fronts:

• The average spending on proprietary American Express cards hovers around $12,000 per year, which is 2-4 times higher than Visa or MasterCard.
• American Express has the lowest exposure to subprime cardholders (based on credit score), thus reducing risks of write-offs when cardholders do not pay their bills.
• American Express owns nearly half of all transaction volume in the U.S. Small Business niche, which is estimated to charge nearly $200 billion on cards a year. This business has grown nearly 20% a year from 2003-2006.

[edit] Issuers

In terms of primary issuers, which include banks and standalone companies, American Express is the top ranking based on charge volume. Banks are not true head-to-head competitors because they are now allowed to issue American Express cards since the 2004 ruling.

Source: Company Reports.

[edit] References

1. ↑ CNN Money: "UPDATE: American Express Co To Become Bank Holding Company" 10 Nov 2008
2. ↑ CNN Money: "American Express seeks $3.5B from feds" 12 Nov 2008
3. ↑ AXP 2008 Financial Results
4. ↑ AXP 8-K 1Q 2009 "Statements of Income" p.6
5. ↑ Obama signs sweeping credit card reform bill. John Poirier. Reuters.
6. ↑ Key provisions of credit card reform bill. MSNBC.
7. ↑ Credit-Card Fees Curbed. Sudeep Reddy. The Wall Street Journal.