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Analysts Jump on American Express Growth Bandwagon

Stocks in this article: AXP V MA DFS

NEW YORK (TheStreet) -- American Express (AXP) is making a major push for retailers to consider it a true alternative to Visa (V) and MasterCard (MA), and Wall Street analysts are buying.

During the company's semi-annual investor conference last Wednesday, American Express president for global merchant services Anre Williams announced a new initiative called OptBlue, through which "third-party acquirers will contract directly with US small merchants for American Express card acceptance. They will sign the merchant, own the contract, determine the pricing with the merchant and provide servicing," according to a transcript provided by Thomson Reuters.

This is the latest effort by American Express to compete for small merchants' business. "Many small merchants believe we are too expensive and many think we are more cumbersome to work with because we are different than Visa and MasterCard," Williams said. But through the new program, merchants "now have the convenience of working with a single source, the third-party acquirer who has the flexibility to give them one pricing construct, a single statement, one settlement process and one contact for servicing for all of the major card brands the merchant chooses to accept."

The company in its presentation last week also said that out of an estimated $4.4 trillion in spending by small U.S. merchants during 2013, the "plastic spend" was only 9%, underlining a major growth opportunity. Through its OPEN program, the company said it had seen a compound annual growth rate of 12% from 2010 through 2013.

American Express last month reported 2013 earnings of $5.359 billion, or $4.88 a share, on revenue of $32.974 billion, increasing from earnings of $4.482 billion, or $3.89 a share, on revenue of $31.555 billion, during 2012. The company reported returns on average equity (ROE) of 27.8% for the fourth quarter and for 2013. The full-year ROE was up from 23.1% during 2012.

Those are very strong numbers, and analysts believe the good times for American Express will continue, with a consensus 2014 EPS estimate of $5.45, rising to $6.05 in 2015.

Morgan Stanley analyst Betsy Graseck on Monday upgraded American Express to "overweight" from "equal weight," while raising her price target for the shares to $100 from $90. Graseck left here 2014 EPS estimate for American Express unchanged at $5.55, but raised her 2015 EPS estimate to $6.36 from $6.30, and her 2016 estimate to $7.14 from $6.98.

"Amex's US merchant penetration has been just 67% of [Visa and MasterCard's]. Why? Small merchants perceive Amex as more expensive, more cumbersome with its independent account statements, and slower to pay. Lower card acceptance has limited AXP's share of both cardholders and cardholder wallet," Graseck wrote in a note to clients.

But she is a believer in OptBlue, since "Amex will eliminate statement charges and provide next-day payment to small merchants."

Graseck cited Discover Financial Services (DFS) for providing a "compelling precedent," as that company was able to increase "merchant penetration from 75% to 90% in 2008/09 after signing on third-party acquirers."

She believes American Express will see compound annual growth rates of 7% for revenue and 14% for earnings through 2016. The higher growth rate for earnings assumes continuing improvement to operating leverage, as the company cuts costs, and also factors in large repurchases of shares. The company bought back $3.992 billion in common shares, while reducing its average share count by 4%. American Express expects to complete $1 billion in buybacks during the first quarter.

Graseck's upgrade followed an upgrade of American Express to a "buy" rating by Montgomery Scott analyst Sameer Gokhale on Thursday.

Shares of American Express were up 0.8% to $87.69 in morning trading.

This chart shows the stock performance American Express against the Dow Jones Industrial Average and the S&P 500 since the end of 2011:

AXP Chart data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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