A clash of the credit card titans is developing this week with American Express Company AXP and Visa Inc. V scheduled to report their earnings within a day of each other. These results will be released even as American Express struggles to get affluent customers to spend more using its cards. Meanwhile, a younger generation of consumers has begun to prefer experiential rewards compared to the older stands of good living which American Express represents.
Meanwhile, some of American Express’ defeats have been profitable for Visa. For instance, following the end of its association with American Express, Costco Wholesale Corp. COST has now tied up with Visa. It is experiencing growth from the acquisition of Visa Europe and solid growth in payments volume as well as processed transactions.
With Visa and American Express scheduled to report on Apr 19 and Apr 20, respectively, this may be a good time to consider which of these a better stock is. While American Express has a Zacks Rank #3 (Hold), Visa carries a Zacks Rank #2 (Buy) rating. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Other major earnings scheduled at this time include Verizon Communications Inc. VZ and Morgan Stanley MS.
Amex Poised for Growth, Visa Strong on Digital Footsteps
American Express remains well poised for growth on the back of its solid market position, strength in card business and significant opportunities from the secular shift toward electronic payments. Estimates for 2017 and 2018 have witnessed upward revisions over the last 60 days. However, an increase in provision for losses might be a headwind for the stock.
Meanwhile, Visa recently announced that it has reached a milestone by expanding Visa Checkout to more than 20 million enrolled accounts.Visa Checkout offers consumers an expedited and secure payment experience for online transactions wherever this service is enabled. (Read: Visa's (V) Digital Initiatives Gain on Checkout Expansion)
Shares of both American Express and Visa have notched up gains in the year to date period. But Visa is the clear winner on this count with a gain of more than 15% year to date. In contrast, American Express has only increased by 3.5%, falling behind both the Dow and the S&P 500 which have gained around 5% and 4%, respectively during this period.
Though American Express and Visa are classified into different Zacks categorized industries, the average one year trailing 12-month P/B ratio is the best multiple for valuing the card processing business because of large variations in earnings results from one quarter to the next.
Coming to the two stocks under consideration, with a P/B ratio of 3.33, American Express is overvalued compared to the Zacks Financial – Miscellaneous Services industry. On the other hand, Visa has a P/B ratio of 7.24, which is why it is undervalued compared to the Zacks Financial Transaction Services industry.
In the last one-year period, the dividend yield for American Express was higher than the broader industry. While the Financial Miscellaneous Services industry offers a yield of 1.53%, American Express returns 1.69%. Visa falls marginally short on this count, providing a dividend yield of 0.74% compared to the industry average of 0.77%. But even on absolute terms, American Express is better off on this front compared to Visa.
Earnings History and ESP
Riding on higher revenues, Visa posted first-quarter fiscal 2017 (ended Dec 31, 2016) earnings per share of 86 cents per share, handily beating the Zacks Consensus Estimate of 78 cents. Also, the bottom line improved 7% year over year. Net operating revenue of $4.5 billion surpassed the Zacks Consensus Estimate of $4.3 billion. Also, revenues climbed 25% year over year.
In contrast, American Express’s fourth-quarter 2016 adjusted earnings per share of 91 cents missed the Zacks Consensus Estimate of 98 cents per share. American Express reported revenues of $32.12 billion for full-year 2016, surpassing the Zacks Consensus Estimate of $32.04 billion. However, revenues declined 2% year over year.
Considering a more comprehensive earnings history, Visa has delivered positive surprises in all the prior four quarters with an average earnings surprise of 5.8%. In comparison, American Express delivered an earnings beat in three of the trailing four quarters, with an average positive earnings surprise of 9.5%. When considering Earnings ESP, there is nothing to choose from between the two stocks with both having readings of 0.
Our comparative analysis shows that American Express holds an edge over Visa only when considering dividend yield. However, on all other counts, Visa is clearly a better stock. Despite the fact that earnings ESP is 0 in both case, Visa carries a Zacks Rank #2. This is why it may be better to bet on Visa over American Express.
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