American Express (AXP – Free American Express Stock Report) is one of the largest financial services companies in the United States and its products and logo are well known around the globe. However, like most other corporations, Amex started from humble beginnings.
The company was founded in 1850 in Buffalo, New York. At that time, most lengthy journeys were done by steamship or train. However, this was before the Transcontinental Railroad, so coach or horse travel was typically necessary to reach one’s final destination. The United States Postal Service traversed the country and delivered letters, but larger parcels and valuables would be handled by an express company. American Express, founded by Henry Wells, William G. Fargo, and John Butterfield, was one such company. These same individuals, in 1852, founded Wells Fargo (WFC) when some of the corporate directors objected to expanding its operations to California.
Over the next few decades, American Express grew rapidly. It inked deals with a number of railroad and steamship companies to expand its express business into new states and territories. In 1882, it entered the financial services industry by offering money orders and in 1891, launched its Travelers Cheque business. This offering filled an important niche. Prior to this, travelers were able to transfer funds from the United States to Europe only via a letter of credit, a tedious and time-consuming process. Only certain banks were authorized to offer this service and it took several days for these transactions to be processed. The Travelers Cheque was a significant improvement compared to the letter of credit. Its signature and countersignature provision made it secure and it could be easily converted into foreign currency at any American Express freight office. In addition, if lost or stolen, Amex would refund the owner’s money. This product become very popular with travelers and provided the company with a major additional revenue stream.
Eventually, tourists and business travelers began to consider American Express’ freight offices as banking substitutes, a place where they could convert funds and seek information. Around 1915, American Express officially entered the travel industry, offering hotel and transportation information services. Over the next few decades, the company changed dramatically. The express business, due to the World Wars, antitrust legislation, as well as fierce competition, became less profitable and management was actively searching for new directions.
Credit Cards and Acquisitions
In the mid-1950s, the American Express Green Card, its first charge card, was introduced. On the first day that it went on the market, the company received more than 250,000 applications and it possessed in excess of a half-a-million cardmembers within the first few months. In the 1960s, the company aggressively sought acquisitions. It purchased W.H. Morton & Co., an investment banking house that specialized in underwriting municipal and government bonds. It also bought the Fireman’s Fund Insurance Company, at the time, one of the largest property & casualty insurers in the country. Due to these additions, American Express’ bottom line advanced materially over the next several years.
However, during the 1970s, Amex fell on some hard times. Its business and reputation suffered when four consecutive acquisition attempts failed. The last, and most noteworthy, was the company’s endeavor to purchase McGraw-Hill (MHP), the large publisher. At the time, Roger Morley was Amex’s President and also served on McGraw-Hill’s board. After the acquisition fell through, McGraw-Hill sued American Express and accused Mr. Morley of corporate dishonesty, among other things. In 1982, its acquisition slump ended with the important purchase of Shearson Loeb Rhoades, one of the largest brokerage firms (Shearson later was sold and became part of Lehman Brothers.) Additional acquisitions throughout the 1980s further bolstered American Express’ financial products and services.
In the 1980s, the company also expanded its card business. At the beginning of the decade it had approximately 10 million cardholders and 400,000 places where its cards were accepted. Before the calendar turned to 1990, Amex possessed 33 million cardmembers and they could be used at almost three million locations. Also, in 1987, it began offering the Optima, its first credit card. Previous to this event, all Amex cards were charge cards, meaning that the balance had to be paid in full every month. The Optima was well received by U.S. consumers. At this time, management positioned the credit card business as a premium service, a strategy that it still follows to this day. It typically charges a higher annual fee than most other credit card companies, like Visa (V - Free Visa Stock Report) and Mastercard (MA). As for the merchants who accept the card, Amex levies a higher percentage of the purchase amount. In turn, customers typically receive a higher level of service, as well as better credit card rewards.
Although its card business expanded rapidly during the 1980s, American Express, once again, struggled somewhat. Due to the stock market crash of 1987 and subsequent recession, its brokerage business incurred hefty losses. During this time, management decided to streamline operations and concentrate on its card and Travelers Cheques businesses. It sold Shearson and spun off First Data, its card processing arm (First Data, at this time, also owned Western Union (WU)). The capital it raised from these divestitures helped Amex bolster its business abroad. Over the next several years, it cobranded credit cards with France-based Credit Lyonnais and expanded into Australia, Japan and China, among other countries.
American Express Today
Today, American Express is a financial behemoth. Although Travelers Cheques are no longer used widely, the company has approximately $152 billion in total assets and 63,500 employees worldwide. Revenues in 2012 exceeded $31.5 billion and its 102.4 million cards-in-force made more than $888 billion worth of purchases during the past year. It continues to charge cardholders and merchants higher fees. The company has successfully developed a reputation of providing superior products and services, which causes most users to tolerate the elevated cost. In addition, the company is typically more selective in regard to credit card applications. It focuses on obtaining higher net worth individuals, who possess above-average credit scores. This strategy helped it weather the 2007-2009 recession better than some of its competitors. That said, Amex did suffer during 2008 and 2009. Its net profit dropped significantly due to elevated net-charge offs and credit card defaults. In early 2009, its stock price fell to a low of $9.70. For comparison purposes, the shares traded for more than $65 during 2007. On the bright side, it has recovered mightily. Indeed, AXP stock is up about 32% year to date through early August, thanks in large part, to Amex’s healthy growth prospects and shareholder-friendly actions.
American Express has earned a reputation of being a financially strong company, with a solid business model, and products that span the globe. Although the stock will probably continue to be sensitive to swings in the U.S. economy, we typically recommend this Dow component (member since 1982) to investors with a long-term investment strategy. We expect that its credit cards and other products will remain popular with consumers and businesses, which should lead to healthy earnings gains and solid stock price performance over the long run. However, shares of American Express now appear fully valued, thanks to the aforementioned uptick in its value.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.