Case Study: AXP vs. COF… Enter MA

So far this earnings reporting season one notable trend we have found is that companies with greater overseas revenue exposure have had a higher propensity to beat top and bottom line forecasts. One way to illustrate this is by comparing Capital One (COF) and American Express (AXP). While both companies have differences, they share one big similarity. They are big players in credit cards. Amex derives 88% of its sales through plastic, while about 60% of Capital One’s revenues come from credit cards.

While each company gets the majority of its business from credit cards, it is where they get the business that matters. COF is exclusive to the United States, while AXP has its exposure to the US consumer hedged with international consumers (33%).

When both companies reported earnings on April 19th, the effect was clear. COF missed its EPS target by 36 cents ($1.62 vs. 1.98), citing missed credit card payments and weakness in its mortgage business. While one would assume that weakness in COF’s credit card portfolio would also show up in AXP’s, the results failed to confirm that. In AXP’s report, it beat the consensus forecast by eight cents (0.87 vs. 0.79), citing strength in its global operations and cost cuts.

Since they both reported after the close on the 19th, AXP is up over 5%, while COF is down 2%. AXP shareholders benefit from the company’s foreign exposure while COF’s are hurt by the lack of international sales. This is not a new trend either. Since the US dollar peaked in July 2001, AXP has done considerably better than COF (+85% vs. +25%). Adapting the slogan from COF, what’s in your portfolio? Hopefully AXP.



While AXP and COF have already reported their results for the first quarter, how can investors play this trend of companies with higher international sales beating forecasts?

One name in the same industry as our two examples is MasterCard (MA). In 2006, MA derived 47.7% of its revenues in foreign markets. While the stock has had a solid run since its IPO nearly a year ago, it has been stuck in a range for nearly the last six months. A positive earnings report on 5/2 could be just what the stock needs to break out of this range, especially when the dollar has declined by nearly 5% in the last six months.