American Express Company (AXP) and Discover Financial Services (DFS) are well-known financial services companies that offer credit cards globally. AXP provides charge and credit payment card products and travel-related services to consumers and businesses worldwide. Its products and services also include merchant acquisition and processing, point-of-sale marketing, fraud prevention services, and the design and operation of customer loyalty programs. In comparison, DFS operates as a digital banking and payment services company worldwide. It issues credit cards, offers student and personal loans and savings products, and manages automated teller machine networks.

Rising consumer spending and economic recovery driving an increase in credit card transactions. Furthermore, an increasing preference for digital transactions is incentivizing credit card companies to collaborate with leading online platforms to expand their user bases. The global credit card market is expected to grow at a 1.1% CAGR to$107.69 billion by 2025. So, both AXP and DFS should benefit.

While AXP shares have gained 48.7% in price over the past year, DFS has surged 107.5%. DFS is a clear winner with 17.7% price gains versus AXP’s 7.4% returns in terms of their past six months’ performance too. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On July 01, 2021, AXP launched a refreshed U.S. American Express Consumer Platinum Card that offers even more value to card members with additional and expanded travel and everyday benefits and services across dining, wellness, retail, and entertainment. The company expects more customers to enroll in  Platinum membership in the coming months.

On July 13, 2021, DFS and SIBS MB, a SIBS Group company that manages cash withdrawals and electronic purchases at the ATM and POS of the MB Network, signed a strategic agreement that gives Discover, Diners Club International, and network alliance cardholders the ability to use their cards on the SIBS MB network at merchant and ATM locations across Portugal and internationally. Alliances with strong regional payments networks will enable DSF to provide a better user experience and expand its reach.

Recent Financial Results

For its fiscal second quarter, ended June 30, 2021, AXP’s total revenues increased 33.5% year-over-year to $10.24 billion. The company’s pre-tax income came in at $5.93 billion for the quarter, up 452.4% from the prior-year period. While its net income increased 787.2% year-over-year to $2.28 billion, its EPS increased 865.5% to $2.80. As of June 27, 2021, the company had $96.21 million in cash and cash equivalents.

For its fiscal second quarter, ended June 30, 2021, DFS’ total revenue increased 34.4% year-over-year to $3.58 billion. The company’s pre-tax income was  $2.22 billion, versus  a $461 million loss in the year-ago period. DFS’ net income was $1.70 billion, compared to a $368 million net loss in the prior-year period. Its EPS came in at $5.55 for the quarter, versus a $1.20 loss per share in the year-ago period. The company had $15.45 billion in cash and cash equivalents as of June 30, 2021.

Past and Expected Financial Performance

AXP’s revenue and net income have grown at CAGRs of 2.6% and 27.3%, respectively, over the past three years. The company’s EPS has grown at a 31.2% CAGR  over the past three years.

Analysts expect AXP’s EPS to increase 33.1% year-over-year in the current quarter ending September 30, 2021, 134.3% in the current year, and 6.3% next year. Its revenue is expected to grow 20.7% year-over-year in the current quarter, 13.4% in the current year, and 14% next year. The stock’s EPS is expected to grow at a 41% rate over the next five years.

In comparison, over the past three years, DFS’ revenue and net income have grown at CAGRs of 13.3% and 27.9%, respectively. The company’s EPS has increased at a CAGR of 35.5% over the past three years.

DFS’ EPS is expected to grow 32.7% year-over-year in the current quarter of the current year, 360.8% in the current year, and decline 24.9% next year. However, its revenue is expected to grow 8.8% year-over-year in the current quarter, 8.9% in the current year, and marginally next year. Analysts expect the stock’s EPS to grow at a 55.8% CAGR over the next five years.

Profitability

AXP’s trailing-12-month revenue is almost 3.5 times what DFS generates. However, DFS is more profitable, with a 94.8% gross profit margin versus AXP’s 72.3%.

Also, DFS’ ROE, ROA, and net income margin of 42.6%, 4.3%, and 44.8%, respectively, compare favorably with AXP’s 30.2%, 3.7%, and 18.4%.

Valuation

In terms of non-GAAP forward P/E, AXP is currently trading at 18.23x, which is 138% higher than DFS’ 7.66x.

In terms of non-GAAP forward PEG, AXP’s 0.40x is 344.4% higher than DFS’ 0.09x.

POWR Ratings

While AXP has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, DFS has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

Both AXP and DFS have a B grade for Momentum, which is in sync with their impressive price gains. Over the past nine months, DFS has gained 45.6%, and AXP surged 35.9%.

Both  stocks have a B grade for Sentiment, which is consistent with favorable analyst earnings estimates. Analysts expect AXP’s EPS to come in at $8.83 for the current year, representing a 134.2% year-over-year increase. The $16.59 consensus EPS estimate for DFS’ current year earnings of indicates a 360.8% rise from the prior-year period.

Of the 51 stocks in the Consumer Financial Services industry, AXP is ranked #18, while DFS is ranked #7.

Beyond what we’ve stated above, our POWR Ratings system has also rated DFS and AXP for Value, Stability, Quality, and Growth. Get all AXP ratings here. Also, click here to see the additional POWR Ratings for DFS.

The Winner

While increasing credit card transactions are expected to benefit both AXP and DFS, higher profitability, lower valuation, and better analyst sentiment make DFS a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Consumer Financial Services industry.

AXP shares were unchanged in after-hours trading Wednesday. Year-to-date, AXP has gained 34.66%, versus a 20.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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