Thursday, April 21, 2011

American Express 1Q 2011 Earnings

American Express (AXP) handled just 3.9% of the worldwide purchase transactions last year.

Currently, it is the 4th largest card network by that measure.

#1 Visa (V): 66% of global purchase transactions
#2 Mastercard (MA): 25%
#3 UnionPay (Shanghai-based): 4%

So Visa's and Mastercard's transaction market share dwarfs American Express but they have very different business models and, as a result, the economics are not nearly the same. While having just a fraction of the purchase transactions, AmEx actually produces more revenue and earnings.*

AmEx
2010 Revenues = $ 27.8 billion (net of interest expense)
2010 Earnings = $ 4.06 billion

Visa
2010 Revenues = $ 8.06 billion
2010 Earnings = $ 2.97 billion

So Visa has a fine high margin business but AmEx, with less than 1/15th Visa's transaction market share, somewhat amazingly is able to generate both more revenues and earnings. Their model, one which employs a closed loop network, enables AmEx to produce much more economic value for each transaction.

A typical AmEx customer spends more per transaction and, as a result, ends up with a somewhat greater percentage of payment volume than transaction volume. In fact, AmEx customers spend roughly 3-4 times as much per card as Mastercard and Visa cardholders. Also, AmEx generates more revenue as a percentage of the payment volume -- 2.5 percent and even higher when discount fees, card fees, travel commissions, and other fees are included -- than Visa or Mastercard.

Mastercard and Visa, in fact, get only a fraction of that amount.

These differences, at least in part, explain why AmEx generates so much revenue despite handling a much smaller number of transactions.

They also help to explain why, at least up to now, it has remained a wide moat business.

One downside is AmEx's exposure to credit risk. Visa and Mastercard have none since financial insitutions, the customers they serve, take on that risk. AmEx generated 84% of its revenue from the various fees/commissions and 16% from net interest income in the 1st quarter of 2011. So the company remains very spend-centric while its closed-loop peer Discover (DFS) is more lend-centric.

From the latest quarterly earnings release:

The company's return on average equity (ROE) was 27.9 percent, up from 18.0 percent a year ago.

"Record earnings this quarter reflect credit quality and billed business trends that are among the best we’ve seen," said Kenneth I. Chenault, chairman and chief executive officer, American Express. "Cardmember spending was up 17 percent, with broad-based strength across all our businesses segments. After several years of decline, our lending portfolio leveled off and total revenues grew at the healthiest pace since before the recession."

Prior to the financial crisis, AmEx had peak earnings in 2007 of $ 4.01 billion.

This article in The New York Times has a good summary of its most recent results.

This year, the company's earning power will easily eclipse pre-crisis levels and, while never exactly weak, a much stronger balance sheet.

Adam

Long position in AXP established at much lower prices

* See AmEx's results for the period ending 12/31/10 and Visa's results for the period ending 09/30/10.
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