Despite the loss of Costco Wholesale (NASDAQ: COST), American Express (NYSE: AXP) is still great contrarian play in finance. What’s more interesting is that Amex is also a really good value investment.
The reason why American Express is an excellent value and contrarian investment is obvious to anybody that looks at the financials. Despite its well-documented revenue decline, Amex is swimming in cash right now. The Buffett favorite has a lot of float; and that float is growing.
The following numbers for Second Quarter 2016 prove this thesis very well:
- Cash and short-term investments of $34 billion on June 30, 2016. Ycharts reported that American Express added $8.95 billion in cash and short-term investments during the second quarter of 2016. The company reported having $25.05 billion in the bank in March, and $34 billion in June.
- A net income of $5.606 billion on June 30, 2016. The net income up was slightly from $5.064 billion in March, but it did not fall by $1.285 billion during the second quarter like Visa’s (NYSE: V). Visa reported a net income of $6.857 billion in March that fell to $5.572 billion in June.
- A free cash flow of $2.167 billion.
- A profit margin of 24.47%.
- Assets of $160 billion. Amex’s Assets grew by $1.18 billion during the last quarter.
- Diluted earnings per share ratio of 5.69.
- A return on equity of 26.54%
- A dividend yield of 1.81%
Amex is Still a Great Investment
Amex is a great investment; because all that occurred during a quarter in which the company’s revenues fell, by $50 million. American Express reported revenues of $32.96 billion in March and $32.91 billion in June.
Despite its’ revenue losses; American Express is still a very profitable company that generates a lot of cash. It is actually generating more cash; which will give Amex the float it needs to survive the loss of its Costco business.
If you are looking for a contrarian play in finance; or credit cards, American Express is definitely it. The company is still making a lot of money; even with revenue losses, and it has excellent potential for future growth.
Fintech is providing some interesting opportunities for Amex including peer to peer lending and mobile payment apps. It already supports Apple Pay and Android Pay. An even greater opportunity for American Express would be to follow in MasterCard’s (NYSE: MA) footsteps and launch its own digital wallet. MasterCard is offering a product called Masterpass which allows users to pay by phone using their card balances.
Amex is in a great position to take advantage of peer to peer to lending, because of all the cash it has. Unlike its competitors; such as Lending Club (NYSE: LC) and OnDeck Capital (NYSE: ONDK), American Express has the resources to make peer to peer lending into a profitable business.
Should American Express buy Square?
It also has the money to make serious acquisitions in the Fintech arena if the management wants. There are some interesting opportunities out there; including Square (NYSE: SQ) which had a market capitalization of $3.194 billion on July 25, 2016.
That would be chump change for American Express, but it might be a great investment. Buying Square would give American Express technological capabilities to rival PayPal Holdings’ (NASDAQ: PYPL) Braintree subsidiary.
Amex needs Square because PayPal is emerging as the biggest direct competitor for its small-business customers in the US. Square would provide a portal for American Express to sell other product; like loans and credit cards, to small merchants. It would also be a great marketing tool because small merchants love Square; my hairdresser and locksmith both swear by it.
Another reason why Amex needs something like Square is to establish itself with younger entrepreneurs, who are not familiar with its brand. Persons under 40 or 50 see American Express as just another credit-card brand; offering one stop lending and payment processing services in addition to credit cards, might change that.
There is no better contrarian play in finance than American Express right now. It is making a lot of money, and in a great position to take advantage of the exciting opportunities offered by Fintech.