U.S. Markets closed

Is American Express Company a Buy?

Eric Volkman, The Motley Fool

For some time now, American Express (NYSE: AXP) has suffered in comparison with arch-rivals Visa (NYSE: V) and Mastercard (NYSE: MA). All three have done well lately on the back of a growing global economy and a general move away from cash payments to card transactions. However, Visa and Mastercard's recent results have been superb; compared to them, AmEx's aren't quite that impressive. Still, the company is delivering, and it looks poised to have a strong 2018. Let's examine whether that makes its shares worth owning just now.

American Express card

Image source: American Express

Rapid recovery

One reason why Visa and Mastercard are more popular is because neither has recently lost a major business partner. In 2016, AmEx was unceremoniously dumped as the exclusive credit card accepted at Costco Wholesale (NASDAQ: COST) registers, and as the sole co-branding partner of the big retailer's proprietary credit card. And guess which brand replaced it in both positions? That's right, Visa.

This was a stinging loss for AmEx, and it's still recovering. Look at the effect on revenue and profitability starting in mid-2016, when Costco's switch from AmEx to Visa occurred:

AXP Revenue (TTM) Chart

AXP Revenue (TTM) data by YCharts

However, AmEx is doing a good job getting on with its life. It's cleverly exploited the great advantage it's always had over the competition -- the exclusivity and, quite frankly, snob appeal of its high-end cards -- by boosting the perks for its "members." It has also sensibly prioritized loan growth; after all, higher loan balances generally mean more take from interest charges.

These moves are working. AmEx members used their plastic more: their total spending rose by 8% on a year-over-year basis in fiscal 2017. Card fees (7% higher), other fees and commissions (up by 10%), and interest on loans (13%) rose at encouraging rates. All outpaced the 6% growth in total expenses, which was driven by heavier spending on member rewards and services.

As a result, total revenue grew by 4% (or 8% if we strip out the last of the Costco-derived revenue), to just under $33.5 billion for the year. Headline net income took a sharp nose dive, but this was due to a huge one-time charge taken in advance of the government's recently passed Tax Cuts and Jobs Act.

Adjusted for that, AmEx booked a per-share net profit of $5.87 for the year, a 4% improvement and well above the company's initial estimates for the period. The bottom line was negatively affected by a sharp (36%) increase in loan-loss provisions, which is worrying some AmEx-watchers. In my opinion, though, this is not overly unusual or suspect for a cautious finance sector company bulking up its loan book.

Inexpensive and attractive

AmEx clearly expects that its 2017 initiatives will keep the growth train running this year; it's projecting per-share earnings of $6.90 to $7.30 for fiscal 2018. In other words, it believes it'll post growth of at least 17.5%. Meanwhile, its shares are currently priced at an anticipated one-year forward P/E of just over 13, suggesting that the stock is undervalued.

I've been a believer in AmEx's recovery story ever since the death of the Costco relationship, and I'm even more of a bull following these results. The company had good momentum going into this year, and I believe that'll continue -- its members are clearly eager to keep spending money. Signs point to a good 2018 for the company, and now would be a good time to invest in its stock.

More From The Motley Fool

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard and Visa. The Motley Fool recommends American Express and Costco Wholesale. The Motley Fool has a disclosure policy.