Visa Versus American Express: Which Stock Is More Lucrative?

The payments industry is undergoing rapid transformation thanks to increased use of card-based transactions like credit and debit cards coupled with strong growth in e-commerce and mobile payments. This burgeoning industry provides a unique growth opportunity for companies like Visa Inc. (NYSE:V) and American Express Co. (NYSE:AXP) given their strong international brands and state-of-the-art payments network.

Both companies are classified under different Zacks categorized sectors and shares of both have outperformed their respective subsectors in the year to date. While Visa has gained 20.6%, the Zacks categorized Financial Transaction Services industry has added 16.7%.

On the other hand, American Express has rallied 8.4% compared with the gain of 3% for the Zacks categorized Financial Miscellaneous Services industry. A comparison clearly shows that Visa has rewarded its investors more handsomely.

Although both companies boast strong business lines and solid growth prospects, Visa with its Zacks Rank #2 (Buy) looks better as an investment than Zacks Rank #3 (Hold) American Express. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Below we will substantiate our reasoning.

Earnings History and Estimate Revision

A look at the most recent earnings performance states that Visa scored better than American Express. While Visa beat earnings estimates by a good 8.9%, American Express delivered a positive earnings surprise of 4.7%.

Both companies, however, have performed well over the past 28 quarters. Visa exceeded expectations in 24 of the last 28 quarters, while met estimates in the remaining four. It did not miss estimates in any of the last reported 28 quarters. The average earnings surprise for the last four quarters is 7.24%.

On the other hand, American Express exceeded expectations in 23 of the last 28 quarters, met estimates in two and missed in three The average positive surprise for the last four quarters is 9.02%.

For fiscal 2017 (ending on Sep 30, 2017), the earnings estimates for Visa as well as American Express have moved north. Out of 16 analysts covering the Visa stock, 14 revised the 2017 earnings estimates up by 0.9% to $3.35 over the past 60 days. Also, the same for American Express has gone up by 0.9% to $5.72 over the same time frame as five out of 10 analysts covering the stock made upward revisions.

Visa Snaps Up a Major Client of American Express

American Express has suffered a huge blow from the loss of its key client Costco Wholesale Corp. (NASDAQ:COST) in Mar 2016 to Visa. Costco accounted for around 20% of its worldwide loans and 8% of card spending. The loss of Costco left an adverse impact on revenues in 2016.

Also, revenues for the first quarter of 2017 were down 2%, reflecting lower discount revenues and net interest income following the Costco portfolio sale. To make up for the lost business and revive its business portfolio, American Express undertook massive expenditure on marketing which drained its bottom line.

There also lies uncertainty over the fate of the company’s co-brand deal with Starwood, which was purchased by Marriott, last year. On the other hand, Visa is enjoying higher business volume growth with the addition of Costco to its client portfolio. Also, winning another key client, USAA, from Mastercard Inc. (NYSE:MA) has added to its business volumes. For fiscal 2017, Visa expects annual net revenue growth in the range of 16–18%.

Long-Term Growth

Visa is uniquely poised to grow from the recent acquisition of Visa Europe which has already started accruing to its top line. Inorganic growth coupled with growth measures such as technological upgrade, signing up of new deals and partnerships, and international business expansion positions Visa for long-term growth. American Express had an affluent customer base which allowed it to charge its customers higher than its ilk.

However, competition is rapidly intensifying in the space and American Express’ customers are being lured away by enhanced rewards and promotions from its peers. In order to hold back its customers, American Express is offering enhanced freebies and marketing which is eating into its bottom line.

Other Metrics

Visa’s expected EPS growth for (3–5 years) is 16.9%. This is better than American Express’ growth rate of 8.7%.

Also, beta for Visa is 0.94, which shows less volatility than American Express’ beta of 1.19.

Net profit margin for Visa is 39.7%. This is way higher than American Express’ net profit margin of 16%.

Also, Visa has a lower leverage as evident by its debt-to-equity ratio of 0.48 compared with American Express’ ratio of 2.3.

In Conclusion

While both stocks are part of a booming industry, it’s clear that Visa has better growth prospects. This makes Visa an obvious choice for investors when it comes to picking between the two.

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