Benzinga’s latest Stock Wars matches up two leaders in a major industry sector, allowing readers to decide which company is the better investment.
This week, the duel is between major players in the credit card sector: American Express Company (NYSE: AXP) and Discover Financial Services (NYSE: DFS).
The Case For American Express: American Express was founded in 1850 in Buffalo, New York, as an express mail company. This was back in the days when mail was delivered by horseback, and when the company moved to New York City it chose to headquarter on Vesey Street to accommodate its stables.
The horses have long since galloped off into the history books, and today’s American Express is a globally integrated payments company offering business and consumer products and services.
As the world begins to emerge from the economic tumult created by the COVID-19 pandemic, American Express is ratcheting up its marketing efforts to ensure those returning to traveling and brick-and-mortar shopping will be using its cards.
On the travel side, users of the American Express Travel website can now use the company’s “Plan It” feature to set up installment plans for card purchases over $100.
Over on the shopping side, the company is hosting its first Membership Week June 14-18 with special offers including a concert by SZA on LIVENow and access to a limited-edition, travel-inspired capsule collection designed by designer Quincy Moore.
Furthermore, American Express entered the European Open Banking market via a new partnership with the fintech Tink. This will enable American Express’ Western European cardholders to connect with their bank and receive instant identification verification, income checks and account validation.
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For its first-quarter earnings report, American Express recorded net income of $2.2 billion, or $2.74 per share, up from net income of $367 million, or 41 cents per share, one year earlier.
However, the company added that the results “reflected the impact of $1.05 billion ($802 million after-tax) in credit reserve releases, primarily driven by continued improvements in the macroeconomic outlook and strong credit performance.”
The company’s earnings also included $9.1 billion in consolidated total revenues net of interest expense were $9.1 billion, down 12% from $10.3 billion one year earlier. The drop was attributed to declines in the card member spending and loan volumes plus a lower average discount rate.
The frist-quarter consolidated provisions for credit losses resulted in a benefit of $675 million, compared with a provision expense of $2.6 billion in the previous year.
Chairman and CEO Stephen J. Squeri expressed confidence that the company would look back on 2021 as a “transition year,” with the rollout of the Kabbage digital platform to its small business customers and a joint venture in China that expanded its merchant network by 14 million as strategies to “achieve our aspiration of returning to the original EPS expectations we had for 2020 in 2022.”
And there is some confidence that these goals are viable.
On Monday, American Express stock hit a new 52-week high after Wells Fargo raised its price target from $165 to $185 while maintaining an Overweight rating.
American Express opened for trading on Wednesday at $164.99 a whisker below its 52-week high of $166.65 and a far distance from its 52-week low of $89.11.
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The Case For Discover: Discover traces its roots to the early 1980s when Sears Holding Corp (OTC: SHLDQ) sought to expand into the financial services industry through its acquisitions of the brokerage Dean Witter Reynolds, the real estate franchiser Coldwell, Banker & Company and Greenwood Trust Company. The company spun off as an independent company in 2007.
As with American Express, the Riverwoods, Illinois-based company aims to recover from the post-pandemic economy by identifying new opportunities. Last month, it announced pacts with Bahrain’s Eazy Financial Services and Arab Financial Services to expand acceptance for the companies’ cardholders. Discover now has six alliance agreements in the Middle East-North Africa region.
In April, CEO Roger Hochschild told a Bloomberg interview that Discover planned to loosen its underwriting standards to pre-pandemic levels to acquire more cardholders, noting that “widen your credit criteria, the payoff on your marketing dollars gets better.”
Hochschild added the company will seek to hire almost 1,000 employees for a new office on Chicago’s South Side to encourage greater workforce diversity.
The company also had diversity in mind by adding Paul Quinn College in Dallas, one of the nation’s oldest historically Black colleges and universities, to its non-degree College Start program, which enables Discover employees to begin taking college-level courses if they decide to pursue a four-year program.
For its first-quarter earnings report, Discover reported a net income of $1.6 billion, or $5.04 per diluted share, a net loss of $61 million or 25 cents per diluted share for the first quarter of 2020.
Total revenue net of interest expense was $2.7 billion, down 3% from $2.8 billion one year earlier. Discover’s lending products recorded year-over-year declines except for private student loans, which increased $196 million, or 2%, from one year earlier.
The company repurchased approximately 1.3 million shares of common stock for $119 million during the quarter. Discover’s shares of common stock outstanding declined by 0.2% from the prior quarter.
Hochschild insisted the Q1 results were “characterized by sustained strong credit performance, robust sales growth, and solid execution on operating and funding costs,” adding the data can be seen as evidence of the efficiency and capital generation of our digital banking model.”
Discover opened for trading on Wednesday at $123.82, a tad below its 52-week high of $124.47 and far from its 52-week low of $45.40.
The Verdict: With both stocks trading just under their respective 52-week highs, either one would be an asset within an existing portfolio. With a recovering economy and more people popping out their cards to make purchases, it seems unlikely that either company will sail into a reef for the remainder of 2021.
If neither American Express nor Discover is currently in your portfolio, it might be best at this time to just keep an eye on them to see how they progress in the coming months.
This Stock Wars duel ends in a respectful draw.
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