American Express (AXP: Charts, News, Offers) has taken a bold and costly stance against the U.S. Department of Justice’s sweeping anti-trust lawsuit against the three largest credit card companies – Visa (V: Charts, News, Offers), Mastercard (MA: Charts, News, Offers) and American Express. While Mastercard and Visa have reached undisclosed settlements with the DOJ, American Express has remained steadfast in its position, claiming that the DOJ’s lawsuit is a violation of its own efforts to provide a competitive environment to merchants and consumers. American Express has claimed that the DOJ’s approach to leveling the playing field would ultimately limit consumer choice, reduce competition and curtail innovation. Investors had little faith that American Express could hold its own against government regulation, and dumped shares in the company, driving the stock down 7% within two days.
Analysts currently have an average price target of $52 on the stock, forecasting 2010 EPS at $2.81 and 2011 EPS at $3.49. It trades with a low forward P/E of 10.58. The stock pays out a quarterly 0.18 dividend. Despite solid earnings, investors are deathly afraid of the wild card of unending government regulation. Is AXP a bargain or a bust?
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American Express differs from Visa and Mastercard in that it is a bank holding company backed by its own financial arm. Visa and Mastercard have no such financial arms, and mainly profit from bank-partnered swipe fees from merchants, which has kept them fairly safe throughout most of the 2008-2009 financial crisis. American Express, on the other hand, was hit hard by its crippled financial arm, dragging the price down to an 18-year low of $10 in March of 2009. The company operates with four divisions – U.S. Card Services, International Card Services, Global Commercial Services and Global Network and Merchant Services. Its business is considerably more diverse than its aforementioned competitors – it consists of travel, merchant, servicing, marketing and information services. American Express also famously prides itself on serving higher-end clientle than its primary competitors, with higher spending limits and more accumulated benefits. It also charges merchants higher processing fees, which results in some smaller stores dropping the card altogether in favor of its cheaper plastic peers.
The current DOJ anti-trust suit is focused on the opaque process of merchant processing fees. Prior to the suit, merchants were not allowed to reveal processing fees for different credit cards to customers. This means that even though the merchant would incur a heavier charge from one credit card over another, they would be unable to change their final product price. Under the new DOJ rules, merchants would not only be able to reveal these different charges to the customer, but offer substantial discounts in accordance to the credit card used. This would benefit lower cost cards such as Discover and harm higher charge cards like American Express. In addition, American merchants will soon be able to also offer cash-only prices, which will be substantially lower than credit card prices and potentially change spending habits across the country. This system of cash versus credit price is already used in many countries, and will inevitably hurt the bottom line of credit card companies across the board. U.S. Attorney General Eric Holder said of the new assault on the credit card companies, “We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anti-competitive rules, we will accomplish exactly that. The companies put merchants and their customers in a no-win situation.” American Express spokesman Michael O’Neill replied, “Our attitude is that is bad law, bad economic policy. We don’t think there is anything in it for consumers.” In addition, the recently passed Fin Reg Bill has placed additional restrictions on merchant card fees, and will further cloud the future of big plastic in the American marketplace.
The unending barrage of bad news for these companies has sunk these stocks – Visa and Mastercard were sold for weeks on end until their recent recovery on brighter macroeconomic prospects, as was American Express, until its recent defiant move against the DOJ. Yet American Express may have an ace up its sleeve with its diversified portfolio. Whereas Mastercard and Visa earn their main revenue from a single network of swipe fees, thus bearing the brunt of most of the recent legislation, American Express has partnered investments in corporate and travel entertainment as well as a recovering financial arm which can help keep the blood flowing should times get tough for big plastic. In the previous quarter ending in June 2010, the company’s revenue tripled over the previous year due to increased spending and a recovering consumer environment. The company is set to report earnings on October 19, and while the numbers may be even better than the previous quarter, current legislative concerns are sure to weigh on the stock price for the time being.
Other News About AXP
American Express Getting Clobbered (AXP)
AmEx Now Getting To Be Worth A Look – AXP may be getting to cheap to ignore. – (AXP: Charts, News, Offers)
Other Stocks in the News
Baidu.com (BIDU) Inc Down Despite Price Target Boost – Is BIDU about to drop? – (BIDU: Charts, News, Offers)
McDonald’s (MCD), Verizon (VZ) Mark U.S. Profit Slowdown on Consumer Woes – (MCD: Charts, News, Offers), (VZ: Charts, News, Offers)
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
