Big Money in Plastic

It's summertime, and the living is easy for American Express (NYSE:AXP). AXP's stock is ready to pop, as consumers seem ready to spend some serious money this summer, and they'll be using their credit cards to do so.

Not convinced? Consider these statistics on credit cards and spending habits: According to Dun & Bradstreet, consumers spend 12-18 percent more when using credit cards instead of cash. Additionally, McDonald's reports its average transaction is $7 when people use credit cards, compared to $4.50 with cash.

A  study by the American Psychological Association found that using cash discourages spending, and credit or gift cards encourage it. “The more transparent the payment outflow, the greater the aversion to spending, or higher the pain of paying," the APA reports. Cash is viewed as the most transparent form of payment, especially when compared to credit cards.

And, in good times, Americans use their credit cards to spend more. Check out these stats from the Federal Reserve.

From 2002 to 2012, America's credit card debt balances increased by $76 billion:

Year            Total U.S. Credit Card Spending

2012:               $845.8 billion

2011:               $842.5 billion

2010:               $840 billion

2009                $917 billion

2008                $1.005 trillion

2007                $972 billion

2006                $902 billion

2005                $849 billion

2004                $823 billion

2003                $791 billion

2002                $769 billion

Credit card spending has really taken off in the 2000s, as these earlier figures indicate:

1987                $169 billion

1977       !          $39 billion

1967                $1.4 billion

(Source: Federal Reserve)

The trend toward increased credit card spending, especially in good times, really helps a company like American Express. That's what we are seeing right now, with the U.S. economy and with AXP. “This summer appears to be an inflection point for accelerating consumer spending with opportunities for improving balance growth by the card lenders,” reports Guggenheim, in a new research note out this week. The analyst firm just hiked its outlook on AXP from "neutral" to "buy."

The thinking is that higher credit card debt, whether that's good for consumers or not, is great for credit card companies, which benefit by higher loan growth when credit card usage climbs. Amex, along with Capital One and Discover, are now "finally all on track” to post consistently positive year-over-year loan growth, starting in the second quarter, said Nomura Securities analyst Bill Carcache in a research note. “The willingness of the U.S. consumer to put a little bit more spending on their credit cards is rising,” he says.

Carcache is bullish on AXP, but sees higher growth after spinning off its Global Travel division, even as it keeps a 50 percent stake in the operation. “Ultimately, we expect [American Express'] reinvestment of its joint-venture gain to drive market-share growth,” he says.

Barclays also hiked its call on American Express to $100 (it's currently trading at $93 per share), citing low credit losses, which also translate into higher earnings, from AXP. TheStreet.com is also weighing in on American Express, and bullishly so, with a rosy recommendation from firm analysts this week.

"We rate AXP as a buy," TheStreet reports. "This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate."

"The company’s strengths ca! n be seen! in multiple areas, such as its revenue growth, notable return on equity, impressive record of earnings per share growth, increase in net income and solid stock price performance. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated.”

As TheStreet notes, American Express currently out-produces its industry peers in terms of revenue growth, has hiked its earnings-per-share by 15.7 percent in the last quarter on a year-to-year basis, and has seen earnings grow steadily over the past few years.

All are encouraging signs for a financial services company, but it's double the fun with Amex, given stronger consumer sentiment on the economy, and given the consumer's more aggressive usage of credit cards in that improving economy.

Amex has seen its stock price increase by 25% over the past year, primarily because of improving economic conditions, and sturdier company earnings growth.

I see plenty of room for additional upside, definitely over $100 per share this year, as the Great American Consumer flexed his and her muscles, and reaches deep into the household budget to dust off that credit card, and start spending in ways that benefits Amex, and its fortunate shareholders.

Brian O'Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets. 

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