American Express Co. AXP is consistently investing in technology to stay abreast with the rapid technological changes taking place in the payments industry.
The acquisition of companies, such as Mezi and Cake, specializing in niche technology and Artificial intelligence capabilities are noteworthy. Also, the company inked partnership deals with Amazon and PayPal. These contracts will help expand the scope of the company’s digital payments.
The company is ramping up its international business in many ways, led by the OptBlue program, which is increasing merchant acceptance globally. Management perceives regions, namely Japan, the United Kingdom, Mexico, India and China as attractive business destinations.
In China, the company has received the preparatory approval for a clearing and settlement license and also set up a joint venture to develop its payment network. The international markets remain underpenetrated and provide ample growth opportunities for the company.
American Express’ revenues have been increasing since 2016, courtesy of a number of growth initiatives, such as rollout of new products, enhancements of features on the existing ones, changes in pricing. All this boosted revenue growth.
Moreover, we are optimistic about the company’s revenue uptick in the months ahead, given its strong brand, steady efforts toward building business in new growth verticals and a shift toward digital. The company expects to achieve strong revenues in the range of 8-10% for 2019. This compares with 9% revenue growth reported in 2018.
Additionally, recent changes in threshold (from $50 billion in assets to $250 billion in assets) regarding systemically important financial institution (SIFI) have lent a huge relief to American Express, which was designated as an SIFI. As a result of the change in this regulation American Express, which has $189 billion in total assets as of Dec 31, 2018, is outside the purview of the SIFI. As a consequence, the company will be able to save on the regulatory costs and the requirement to keep a buffer of extra capital.
However, American Express is witnessing an increase in card member services, which is expected to stay at elevated levels since the company constantly offers differentiated benefits and plans to attract and retain customers.
Also, the company’s interest cost rose 24% in 2017 and 39% in 2018 due to deteriorated debt levels. The company’s current debt to equity ratio of 258% is higher than the industry’s average of 195%. Consequently, the company’s times interest earned ratio, measuring its interest paying capacity, has declined to 5.9 in 2018 from 6.6. This mounting debt load, higher interest burden and reduced interest coverage ratio point to augmented financial risk.
In a year’s time, the stock has gained 8% versus the industry’s decline of 9%. The company’s progress on its fundamentals is expected to favor its stock in the coming quarters.
American Express carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Federated National Holding Company FNHC, Global Payments Inc. GPN and Cardtronics PLC CATM, each carrying a Zacks Rank #2 (Buy).
All stocks beat estimates in the four reported quarters, the average being 44.9%, 3.3% and 53%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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