Is American Express Overpriced?

Is American Express Overpriced?

Observers ask is American Express overpriced because its stock was trading at $125.29 a share on 8 August 2019.

However, both Visa (NYSE: V) and MasterCard (NYSE: MA) are more expensive than American Express (NYSE: AXP). For instance, Visa was trading at $179.90 on 8 August 2019. Meanwhile MasterCard shares were trading at $278.04 on the same day.

Thus, Mr. Market could underprice Amex. I think American Express’s stock price is low because the company is experiencing impressive revenue growth.

American Express is Experiencing Impressive Revenue Growth

Impressively, Amex’s revenues grew at a rate of 8.49% in the quarter ending on 30 June 2019.

In contrast, Visa’s revenues grew at a rate of 11.45% and MasterCard’s revenues grew at a rate of 12.22% in the same quarter. Thus, American Express’s revenue growth is lagging behind its large competitors.

However, American Express is still making a lot of money from credit cards. Amex reported revenues and a gross profit of $9.977 billion on 30 June 2019. That number was up from $9.555 billion on 31 March 2019.

How Much Money is American Express Making?

American Express made an operating income of $2.219 billion and a net income of $1.761 billion off those revenues. Thus, Amex’s credit card business is still lucrative.

In fact, American Express reported an operating cash flow of $2.93 billion, and a free cash flow of $2.438 billion on 30 June 2019. Therefore, American Express is still the cash-generating machine, Warren Buffett thinks it is. Consequently, Berkshire Hathaway (NYSE: BRK.B) owned $997 million worth of American Express shares in 2018, Buffett’s 2018 letter to shareholders reveals.

Accordingly, Amex had $26.869 billion in cash and equivalents on 30 June 2019. However, Stockrow does not report the value of American Express’s short-term investments on that date. Amex had $308 million worth of short-term investments on March 31, 2019.

Why Buffett Likes American Express

Warren Buffett likes American Express because the company generates float from its 58 million cardholders.

To explain, float is a stream of cash a company receives from regular payments. Amex receives float when people pay their credit card bills each month. In addition, management can use the float for any purpose including paying dividends or expansion.

Amex generates float because it is the 4th largest American credit card company with 58 million cardholders in 130 countries, Cardrates.com estimates. Plus, American Express’s platform processes six billion transactions each year.

Another reason Buffett likes Amex is its ability to grow its revenues. At American Express more revenues means more cash.

American Express is a Good Dividend Stock

The float enables AXP to pay some impressive dividends. For instance, American Express will pay a 39₵ dividend on 9 August 2019.

Plus, Dividend.com credits American Express with seven years of dividend growth. Specifically, the AXP dividend grew by 4₵ in 2018 rising from 35₵ on 9 November 2018 to 39₵ on 8 February 2019. Consequently, American Express shares offered an annualized payout of $1.56, a dividend yield of 1.25%, and a payout ratio of 21.5% on August 8, 2019.

I think the dividend history and the ability to generate cash make American Express a good income stock. Importantly, Amex is a safer income stock because of its ability to grow its revenues.

Amazon is the Future of American Express

I like American Express because technology offers it plenty of opportunities for revenue growth.

For instance, Amex offered its cardholders a $50 discount on Amazon Prime Day 2019. This is a smart move because Coresight estimates Amazon’s (NASDAQ: AMZN) 2019 Prime Day sales at $5.8 billion, RetailDive reports. Impressively Prime Day sales grew from $3.9 billion in 2018.

Additionally, 65 million or 51.3% of US households own Amazon Prime memberships, eMarketeer claims. Notably, eMarketeer expects 56% of Prime members to purchase electronics on Prime Day. Thus, those Prime members were more likely to use their credit cards on Prime Day.

Smartly, they offer an Amazon Business American Express Card, and a Business Prime Card. Importantly, the Business Card offers 3% cash back and 60 day terms on Amazon Business, Amazon Web Services (AWS), and Whole Foods Market purchases. Additionally, the Prime Card offers 5% cash back and 90 day terms at the same retailers.

American Express’s Bright Future

I think Amazon and other online retailers are fueling the growth of American Express. In particular, Amazon is now America’s favorite retailer; and you need a credit or debit card to shop at it.

Plus, Amazon is just one of many digital platforms key to Americans’ current lifestyle. Other popular digital platforms that encourage credit, debit, and prepaid card use include; Netflix (NASDAQ: NFLX), STEAM for video games, Hulu, Uber (NASDAQ: UBER), GrubHub (NYSE: GRUB), and Lyft (NYSE: LYFT).

Notably, Variety claims the video game platform STEAM; or STEAM Store, had one billion accounts and 90 million users in April 2019.  Impressively, the number of STEAM Store customers grew by 23 million between April 2018 and April 2019.

 

Under these circumstances, American Express’s future is bright because vast numbers of people are using digital services that require a credit card, gift card, debit card, or cryptocurrency to use. Predictably, STEAM has serious competitors like the Epic Games Store and the Abyss in operation.

Like STEAM, the Epic Games Store and the Abyss encourage younger people to pay with credit cards if they want to play their favorite massive multiplayer online games (MMOGs). My prediction is more than a few of those MMOG players will reach for their Amex cards when they want to play Fortnite.

If you are seeking a growth, income and dividend stock for the 21st Century, investigate American Express (NYSE: AXP). I think the digital market will drive massive growth at this historic credit card brand during the next decade.  

Originally published at https://marketmadhouse.com on August 8, 2019.

 

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