Current Date and Time:Friday, July 30th, 2010
Date: March 12th, 2010
It would be easy to compare American Express to Visa or MasterCard and group all three companies in the same sector, however to do so would be short-sighted. Visa and MasterCard are transaction processors, whereas American Express is a diversified financial services company. Granted, during bad economic times, because of American Express' multiple line of businesses, certain businesses will perform better than others. Although this can be a negative, the upside is that American Express has more opportunities to expand globally. So the question now is: how and where does American Express expand? Keep in mind that the company should not seek expansion for expansion's sake, but expand intelligently, seeking value and growth for the shareholders.
American Express' consumer credit card business has stabilized in the US market but domestic growth will be limited for at least 3 more years due to poor macroeconomic conditions. And with the current anti corporate fervors in the US, American Express's other business lines have very little room to grow domestically. The European market is in the same boat, if not worse. That leaves us with the new Rome: China. Like every other global company, American Express best prospects are in China. Let me make this point right of the bat: American Express's consumer credit card business will not be profitable in China. In the US, we don't even flinch when we pay 15 percent on our credit cards and earn 4 percent on our savings. Try pulling that on the Chinese and they'll probably hit you on the head with a frying pan. I think the Chinese will more likely borrow money from the mob than from credit card companies, they're more likely to get a better rate from the mob. Corporate credit cards however, have the potential to be a huge market for American Express. Private as well as state run Chinese companies does business worldwide, knowing the Chinese mentality, I think that the prestige of the American Express logo on their corporate cards is a huge source of pride, a sort of understated "I have arrived" statement.
With China now having the second most millionaires in the world (behind the US), the American Express Black (Centurion) charge card could be a huge hit. Charge cards are not credit cards as we common Americans are accustom to. Charge cards are for people who actually have (a lot of) money to spend but don't want to carry cash or use credit cards. A great fit for the Chinese noveau riche. By the way, Black Cards have been issued in Hong Kong but have not been marketed much on the Mainland. But with Shanghai doing 3 times the business of Hong Kong, the Mainland is a lucrative market indeed.
Any company wanting to succeed in China on a grand scale must figure out a way to tap into the 1.3 billion rank and file Chinese, not just the social elite. I realized that we throw around a figure like 1.3 billion all the time these days, but if you really think about it, if they continue on the path towards a free market economy, China will have the greatest purchasing power since - since ... well since no one. Imagine over a billion people purchasing American Express Travelers Cheques, or using American Express travel services, or using American Express to exchange currency along its borders, or doting grandparents buying pre-paid gift cards for their only grandchild (one child rule for ethnic Han Chinese in urban areas). Even half of China's population is twice the US market or the US and European markets combined. Keep in mind though, that it's not just sheer numbers alone that makes a great economy, it is also about people with purchasing power and a spirit of entrepreneurship.
Aside from China, countries that do vast amounts of business with China are also great places for American Express to expand. Let me drop some names: Brazil (China is Brazil number 1 trading partner), Australia, Singapore, and Malaysia. Feel free to repeat the same mindless banter and cliches about China spouted in the western media, but if it were not for the stability of the Chinese economy, the global recession would've sunk much deeper and lasted much longer than it already has. Keep this in mind during election season later this year in the United States where China-bashing is a sport, and China is the built-in excuse for incompetent politicians.
~Huy Nguyen
Remember the good old days when cash was king? These days, most American seldom ever sees currency larger than a 20 dollar bill. In fact, if you were to use a 100 dollar bill to pay for your groceries, the clerk will give you a funny look and double-checks the bill to make sure it's not a counterfeit. Of course, the average American will hardly ever carry more than 40 dollars at any given time. The obvious reason is personal security and because if you accidentally drop 5 Ben Franklins out of your pocket, you can't just call up the Federal Reserve and ask them to cancel the bills and reimburse you. This is the reason why the debit card (credit or charge card if you're willing) is now king. As a result, Visa and MasterCard collectively makes billions in transaction fees. Now, with the acquisition of a company call Revolution Money, American Express is getting into the lucrative card transaction game as well.
At a purchase price 300 million dollars, I think American Express actually got a nice bargain. The potential cash flow that this line of business will produce will make the 300 mil look like chump change. Revolution Money already has a very nice customer base and in addition to sharing the market with Visa and MasterCard, it could potentially take some market share away from dominant online player - PayPal. Revolution Money's transaction fees are very competitive when compared to the big boys. And being a smaller company, it's much more dynamic and innovative than its larger competitors. American Express will retain the current management team once the acquisition is completed.
So with the acquisition of Revolution Money, American Express has the everyday brick and mortar merchant transactions as well as the ever expanding online transactions covered. A double whammy for American Express, it's a hell of a way to jump into the card transaction business.
American Express' CEO has publicly indicated that the company will continue to seek acquisition of businesses under 1 billion dollars if they make sense to the growth of the company. A sort of corporate bargain basement shopping, if you will. And since we are not quite recovered from the recession just yet, there are still bargains to be had.
What I've written so far isn't exactly some great revelation, investors and traders have recognized what American Express is doing, and as a result, the stock crossed the 40 dollar line for the first time since the March bottom. When compared to one trick ponies like Visa and MasterCard, American Express is much more business-diverse, but not overly diverse like GE (a pillar of frustration). And compared to the major financials, American Express is superior because of its more affluent customer base and its multi-faceted businesses WITHIN the financial sector (if American Express start acquiring movie studios or jet engine companies, SELL SELL SELL!!!). Admittedly, the financial sector isn't the best sector to be in right now, but having bought American Express at the ridiculously low price that I paid, owning a small piece of a great American company like American Express is not the worst thing in the world. In fact, I think American Express is in a much better long-term position than 95 percent of the publicly traded financials.
~Huy Nguyen
Fortunately for investors of American Express (AXP), the company is doing everything it can to recapture some of the
value lost during the slaughter in the spring of this year. Case in point is the repayment of the damn TARP loan,
believe or not, the Feds actually tried to prevent TARP borrowing banks from repaying their TARP loans. The Pajamavik
controlled Feds ultimately relented but required the borrower banks paying back the funds to raise their capital reserves.
AXP is doing this by issuing new shares of common stock. Personally, I would've preferred that AXP cut dividends as well.
But nevertheless, AXP sits in a much better position than the Citigroups of the business world. In fact, I would boldly
venture to say that AXP is in a better position now than Visa or Mastercard. As of this writing, AXP shares are trading in the
mid 20's, a considerable increase from a month ago when it was trading in the teens. Although the dividends are a nice gesture
towards the shareholders, cutting it would provide investors with considerable value in the long run, unless of course the
Pajamaviks install Offtherack Pajama as benevolent dictator for life. If this should come to pass then all of our investments are worthless.
~Huy Nguyen
American Express(AXP) did something this week that they and all commercial banks should've done six years ago: DUMP THE DEADBEATS! Here's how it works:
AXP will give deadbeats $300 pre-paid gift cards if they pay off their balance and cancel their accounts thereafter. This is the price that AXP must pay
for lowering their long-standing high creditworthiness standards. But I assure you, this is worth the price. Better to get rid of your dead weight moving forward.
This will save investors a lot more money in the long run.
What I also want to see AXP do is cut dividends now. I would much rather go without the dividends than have AXP borrowing from that godforsaken TARP funds.
There are many pitfalls in the road ahead, but AXP still has a lot of potential, especially for an investor with a long-term horizon. Traders are having a
field day with AXP because in the past six weeks, the stock has been trading within a defined range of a couple of points. For a great trader, this
translate to a couple hundred bucks in his pocket per day, which is a lot better than standing in the soup line. But hey, this is a trader's market anyways.
~Huy Nguyen
| Purchased Price | Current Price |
|---|---|
| 12.75 | 42.00 |
