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Riding on a steady growth momentum following impressive 2013 results, the shares of American Express Co. (AXP - Analyst Report), or AmEx, reached its all-time high of $93.62 on Jan 17. This global payment processor’s shares has risen about 57% alone since the beginning of 2013.

The improved momentum of this Zacks Rank #2 (Buy) stock is driven by strong credit indicators coupled with efficient expense control. AmEx delivered positive earnings surprise in 3 of the last 4 quarters with an average beat of 2.6%.

Friday’s closing price represents a strong one-year return of about 52.2% and a year-to-date return of about 0.3%. On both these grounds, the company outperformed the S&P 500 index of 23.7% and -0.5%, respectively. Average volume of shares traded over the last three months stands at approximately 3,715.9K.

Earnings Review

On Jan 16, AmEx reported fourth-quarter 2013 operating earnings per share of $1.25, a penny lower than the Zacks Consensus Estimate. The results, however, outpaced the prior-year quarter figure of 56 cents per share. Shares rose 3.6% post the announcement of the results.

Results reflected about 5% growth in total revenue against 8% decline in total expenses. Higherinterest income, driven by improved card spending, and lower loss provisions shored up the return on equity (ROE) and book value per share.

Rationale

AmEx expects to keep its expense growth controlled below 3% in 2014 as well. The company’s spend-centric business model, healthy capital and the targeted above-average payout ratio warrant enhanced growth over time.AmEx has also filed its comprehensive capital plan (CCP) with the Federal Reserve. A final approval is scheduled for Mar 2014.

Although financial damages related to litigations and regulations raise caution, we believe improved credit trends, new business initiatives, capital flexibility and stable ratings bode well for AmEx’ growth.

Valuation

Further, valuation looks compelling for AmEx stock. Both on forward price-to-earnings and price-to-book basis, the shares are trading at a premium of about 17% and 55%, respectively, to the peer group average.

Moreover, both return on equity and return on assets of 28.0% and 3.5%, respectively, stand well above the peer group average. Estimated long-term earnings growth is pegged at 11.5%, marginally lower than the peer group average of 12.7%.

Meanwhile, some better-ranked financial stocks include Fidelity National Information Services Inc. (FIS - Analyst Report), Portfolio Recovery Associates Inc. (PRAA - Analyst Report) and Heartland Payment Systems Inc. (HPY - Snapshot Report). All these stocks sport a Zacks Rank #1 (Strong Buy).

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