Founded in 1950, New York-based American Express (AXP) is a leading global financial services company offering card payment products and travel-related services to consumers and businesses across the globe. It is now the third largest player in the US in terms of card transaction volumes, after Visa (V) and MasterCard (MA). It also competes with other financial institutions that have credit card services like Discover Financial (DFS)and Capital One (COF).

What differentiates American Express from MasterCard and Visa is its relatively more affluent customer base, which it maintains by offering generous benefits and reward programs. Since American Express brings higher spending consumers to merchants, it can charge a higher commission (known as the interchange fee) on sales. Also, unlike Visa and MasterCard, American Express only issues charge and credit card products but not debit cards, which have been gaining widespread acceptance over the past couple of years. With these critical differences in mind, we explore the opportunities that lie ahead for American Express in an evolving macroeconomic environment.

Our price estimate is $47.16, which is just slightly higher than the current market price.

Impact of Regulatory Reforms

The Obama Administration in February 2010 passed the Credit Card Accountability, Responsibility and Disclosure Act, or the CARD Act which enforces more disclosure about interest rates, caps on service fees, grace periods and also makes it difficult for people under the age of 21 to obtain cards. All this is expected to negatively impact the growth in the number of cards in use but lead to lower net write-off rates and defaults by card members.

The Durbin Amendment, enacted in July 2010, granted the Fed the power to control the levels of this fee. In December, the Fed enforced one such limit - 12 cents per debit card transaction. While this adversely affects the two largest card payments-processing networks Visa and MasterCard, which also issue debit cards, we believe it presents upside opportunity for American Express as credit cards would gain prominence over debit cards, at least from the issuers' end.

Improving Economic Conditions

The macroeconomic conditions are improving in the US, albeit at a slow pace. The unemployment levels are still close to historical high levels but on a downward slope, declining from 9.8% in November 2010 to 9.4% in December 2010. Consumer spending has picked up and so have the corresponding card transactions.

Household purchases, which constitute about 70% of the economy, grew at 4.4% in December 2010, the highest since the first quarter of 2006.American Express' card delinquency rates (the proportion of outstanding balances past the due date to total balances) continues to decline month on month to 2.1% from 2.5% in the previous quarter. Charge-offs (the loans deemed uncollectible and hence, written-off) also declined from 5.2% to 4.4% over the same period. Improvements in macroeconomic conditions hint at more relaxed card-issuing criteria and higher credit limits.

If spending increases more than we currently forecast, this could improve our price estimate. Drag the trend line in the modifiable chart above to see the impact. For example, a 5% increase in annual spending in 2012 per customer translates to around a 2% improvement in our price estimate.

See our estimates for American Express.

Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.

American Express Outlook Improves on Recovery in Spending originally appeared on BloggingStocks on Thu, 17 Feb 2011 13:20:00 EST. Please see our terms for use of feeds.

Continue reading Americans relying more heavily on their credit cards

Americans relying more heavily on their credit cards originally appeared on BloggingStocks on Fri, 09 May 2008 12:05:00 EST. Please see our terms for use of feeds.

Buffalo Wild Wings

Chipotle Mexican Grill, Inc.-(NASDAQ: CMG) option implied volatility decreases as CMG rallies 18% on upside EPS. CMG, an operator of over 500 companies owned and eight franchise fast-casual Mexican restaurants, reported 1st quarter revenues increased 26.2% to $236 million. CMG is recently up $11.81 to $78.07. CIBC says "CMG delivers big Upside despite tougher comparisons...Foiling shorts." CMG June call option implied volatility is priced at 25, puts are at 33; near its 26-week average of 27, but below yesterday exaggerated level of 38-44 according to Track Data, suggesting decreasing risks. CMG puts are more expensive than calls because CMG is difficult to borrow.

Option volume leaders today are: MasterCard (NYSE: MA), Cisco Systems (NASDAQ: CSCO), Intel Corp. (NASDAQ: INTC) and Newmont Mining Corp. (NYSE: NEM).

Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

Option update 5-2-07: Buffalo Wild Wings & Chipotle option implied volatility decreases after upside EPS originally appeared on BloggingStocks on Wed, 02 May 2007 16:00:00 EST. Please see our terms for use of feeds.