What Credit Card Stock Is A Better Investment?
American Express Company (AXP) and Discover financial services (DFS) are well-known financial services companies that offer credit cards worldwide. AXP provides payment and credit card products and travel-related services to consumers and businesses around the world. Its products and services also include merchant acquisition and processing, point-of-sale marketing, fraud prevention services, and the design and operation of customer loyalty programs. By comparison, DFS operates as a digital banking and payments company around the world. It issues credit cards, offers student and personal loans and savings products, and operates ATM networks.
Rising consumer spending and economic recovery are leading to an increase in credit card transactions. In addition, a growing preference for digital transactions is prompting credit card companies to collaborate with major online platforms to expand their user base. The global credit card market is expected to grow by a 1.1% CAGR to 107.69 billion dollars by 2025. Thus, AXP and DFS should benefit from it.
While AXP shares have gained 48.7% in price over the past year, DFS has jumped 107.5%. DFS is a clear winner with price gains of 17.7% over AXP’s 7.4% returns in terms of performance over the past six months as well. But which of these titles is the best choice now? Let’s find out.
Latest developments
On July 1, 2021, AXP launched an updated US American Express Consumer Platinum Card that offers even more value to card members with additional and extended benefits and services for travel and everyday life in the food and beverage industries, wellness, retail and entertainment. The company expects more customers to sign up for Platinum membership in the coming months.
On July 13, 2021, DFS and SIBS MB, a SIBS group company that handles cash withdrawals and electronic purchases at ATMs and outlets in the MB network, signed a strategic agreement that gives Discover, Diners Club International and network alliance cardholders the possibility of using their cards on the SIBS MB network at merchants and ATMs in Portugal and abroad. Alliances with strong regional payment networks will allow DSF to offer a better user experience and extend its reach.
Recent financial results
For its fiscal second quarter, ended June 30, 2021, AXP’s total revenue grew 33.5% year-over-year to $ 10.24 billion. The company’s pre-tax profit was $ 5.93 billion for the quarter, up 452.4% from the same period a year earlier. While its net profit increased 787.2% year-on-year to $ 2.28 billion, its EPS increased 865.5% to $ 2.80. As of June 27, 2021, the company had $ 96.21 million in cash and cash equivalents.
For its fiscal second quarter, ended June 30, 2021, DFS ‘total revenue increased 34.4% year-on-year to $ 3.58 billion. The company’s pre-tax profit was $ 2.22 billion, down from a loss of $ 461 million in the prior year period. DFS net income was $ 1.70 billion, compared to a net loss of $ 368 million in the prior year period. Its EPS stood at $ 5.55 for the quarter, down from a loss of $ 1.20 per share in the period last year. The company had $ 15.45 billion in cash and cash equivalents as of June 30, 2021.
Past and expected financial performance
AXP’s revenue and net profit grew at a CAGR of 2.6% and 27.3%, respectively, over the past three years. The company’s EPS has grown at a CAGR of 31.2% over the past three years.
Analysts expect AXP’s EPS to grow 33.1% year-on-year in the current quarter ending September 30, 2021, 134.3% for the current year, and 6. 3% next year. Its revenue is expected to grow 20.7% year-over-year in the current quarter, 13.4% for the current year and 14% next year. The stock’s EPS is expected to grow at a rate of 41% over the next five years.
In comparison, over the past three years, DFS revenue and net profit have grown at CAGRs of 13.3% and 27.9%, respectively. The company’s EPS has grown at a CAGR of 35.5% over the past three years.
DFS EPS is expected to grow 32.7% yoy in current quarter of current year, 360.8% for current year, and decline 24.9% next year . However, its revenue is expected to grow 8.8% year-over-year in the current quarter, 8.9% for the current year, and slightly next year. Analysts expect the stock’s EPS to rise at a CAGR of 55.8% over the next five years.
Profitability
AXP’s last 12-month revenue is almost 3.5 times the revenue generated by DFS. However, DFS is more profitable, with a gross margin of 94.8% versus 72.3% for AXP.
In addition, DFS ‘ROE, ROA and net income margin of 42.6%, 4.3% and 44.8%, respectively, compare favorably to 30.2%, 3.7% and 18, 4% AXP.
Evaluation
In terms of a non-GAAP forward P / E, AXP is currently trading at 18.23x, which is 138% higher than DFS’s 7.66x.
In terms of non-GAAP forward PEG, AXP’s 0.40x is 344.4% higher than DFS’s 0.09x.
POWR odds
While AXP has an overall rating of C, which translates to Neutral in our POWR odds system, DFS has an overall rating of B, which is equivalent to Buy. POWR scores are calculated taking into account 118 different factors, each weighted to an optimal degree.
AXP and DFS both have a B rating for Momentum, which is in line with their impressive price gains. Over the past nine months, DFS has gained 45.6% and AXP has jumped 35.9%.
Both stocks have a B rating for Sentiment, which is consistent with analysts’ favorable earnings estimates. Analysts expect AXP’s EPS to rise to $ 8.83 for the current year, which is a 134.2% year-over-year increase. The consensus EPS estimate of $ 16.59 for DFS current year earnings indicates a 360.8% increase over the prior year period.
Of the 51 actions of Consumer financial services industry, AXP is ranked No. 18, while DFS is No. 7.
Beyond what we have stated above, our POWR rating system has also rated DFS and AXP for value, stability, quality and growth. Get all AXP ratings here. Also, Click here to view additional POWR ratings for DFS.
The winner
While the increase in credit card transactions should benefit both AXP and DFS, higher profitability, lower valuation, and better analyst sentiment make DFS a better buy here.
Our research shows that the odds of success increase when betting on stocks with an overall buy or strong buy POWR rating. Click here to access the highest rated stocks in the consumer financial services industry.
AXP shares remained unchanged on Wednesday after trading hours. Year-to-date, AXP has gained 34.66%, compared to a 20.58% increase for the benchmark S&P 500 during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a particular interest in finding market inefficiencies. She is passionate about educating investors so that they can be successful on the stock market. Following…
