American Express selling in the low $20s?
Today, American Express is selling around $23 a share. I realize that consumer spending will be down, that worldwide growth of credit card transactions will slow and that Amex does take on credit risk. But $23 and change is absolutely unjustified.
Amex operates a closed loop model, which captures all economic value along the entire transaction chain. In contrast, Visa and Mastercard act as toll takers. Banks issue cards and take on the credit risk and some profit; Total System Services (TSS) provides electronic payment services to banks or merchants. Amex's closed loop model and low capital needs have historically produced very high returns on invested capital.
Returns have been suffering lately as the company has started to venture outside the superprime market. It's been allowing banks to issue Amex cards and has started to target prime consumers. Even prime consumers are undergoing stress at this point.
However, Amex's core market remains the superprime segment. The global tailwind of increasing use of plastic will continue. And increasing wealth in emerging economies will give Amex more customers to target.
I strongly recommended Amex a while ago but the stock price has continued to drop. But is Amex really worth just $23 a share? I'm thinking more in the high $50s or low $60s.