American Express 1Q 2011 Earnings

American Express (AXP) handled 3.9% of the roughly 120 billion global purchase transactions last year.

Currently, it is the 4th largest card network.

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

So Visa's and Mastercard's 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 global purchase transactions, American Express actually produces more revenue and earnings.

American Express
2010 Revenues* = $ 27.8 billion
2010 Earnings = $ 4.06 billion

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

So Visa has a fine high margin business but American Express, with less than 1/15th Visa's market share, somewhat amazingly is able to generate both more revenues and earnings. The model enables AmEx to get much more of the economic value of each transaction.

It's closed-loop network allows American Express produce economic value across the full value chain. The company's model and brand also gives it pricing power. The key is its focus is on cardholders and merchants instead of big financial institutions.

A typical American Express customer spends more than 3.5x as much as Visa cardholders and 4.5x as much as cardholders from Mastercard. The full 2.5% or so per transaction (~2.5% in discount fees plus card fees, travel commissions and fees etc.) is kept by American Express while Visa and Mastercard get only a fraction of that amount. Combine these differences with what Morningstar says above and you have a wide moat business that produces higher return on equity than just about any other financial institution.

The one downside to American Express is its exposure to credit risk while Visa and Mastercard have none (financial insitutions, the customers they serve, take on that risk). American Express generated 84% of its revenue from fees and 16% from net interest income in the 1st quarter of 2011. So the company remains very spend-centric while peers like Capitol One (COF) and Discover (DFS) are 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, American Express 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.


* Net of interest expense
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American Express 1Q 2011 Earnings
American Express 1Q 2011 Earnings
Reviewed by malaria
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Rating : 4.5