Banking & Finance

The 2016 Bullish and Bearish Case for American Express and Visa

This company may have Warren Buffett and Berkshire Hathaway as the largest shareholder, but the good news stops there as it was among the worst Dow stocks of 2015. Having the highest income client base hasn’t helped the company at this time, and losing Costco just added insult to injury. The dividend is underwhelming as well, and actually turning itself around may be hard considering that American Express already has exited or paired down on so many operations. Is the stock cheap, or is it a value trap?

A strong U.S. dollar hurt American Express in its overseas markets, which in turn precipitated poor earnings over the course of the year. However this was not the case for its counterpart, Visa.

Visa

Visa ended 2015 at $77.55, for a gain of 19.1%, including its dividend adjustments. For the year ahead, the consensus price target is $86.47, so the expected total return for Visa would be 12.2%, if you include its dividend yield of 0.72%.

Visa shares were trading at $75.27 after a couple days of trading in 2016. Visa is considered a winner in the electronic payment and IT services space, and Goldman Sachs sees Visa holding its share and winning in payment processing, despite continued sector pressure from cloud cannibalization.

The company operates one of the world’s most advanced processing networks —VisaNet — which is capable of handling more than 56,000 transaction messages a second, with fraud protection for consumers and assured payment for merchants. Not to mention, Visa is also in over 200 countries.

Early in 2015, Visa had a stock split that completely changed how much it dominated the price-weighted Dow. Visa was originally the most heavily weighted company in the index, and this definitely precipitated a rebalancing of the Dow. Although a split might not mean much in and of itself, it is a move that companies take when they believe it allows more retail investors to buy their stock.


The strong dollar also benefited Visa this year in a manner of sorts by acquiring its European arm. This effectively brings in new streams of revenue, and with the weakening euro Visa may have gained across the board. Credit card companies also seem to have that old swipe/processing fee pressure from Congress mostly behind it.

Keep in mind that credit card companies could be some of the best-performing large cap stocks come 2016, at least that is what the analyst targets might imply. Considering the Federal Reserve plans on raising interest rates this year and banks already have an excess in their reserves, could the velocity of money in the U.S. economy pick up? Accordingly, the faster that money changes hands, the more money credit card companies make as they take a fee on each transaction.

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