Earnings of $1.80 per share included a $0.21 charge related to merchant fees litigation. Excluding that charge, AXP’s 2019 first quarter EPS would have been $2.01, up from $1.86 a year ago and in line with market expectations. Management reported solid growth in billings across all of its customer segments and geographies. Credit quality remained at “industry-leading” levels.
The growth in billings is due almost entirely to an increase in cards issued in the U.S. Cardmember spending was flat. Segment profits in the Global Consumer business declined slightly due mostly to an increase in marketing expenses. The company is also seeing a decline in its Global Merchant & Network Services business outside U.S. as a result of regulatory efforts in the EU and Australia to limit or reduce interchange fees. Loans and loan losses are up, but the increase is modest so far and the incremental net interest income has helped boost the bottom line.
Over past year, AXP has boosted the dividend, but has tempered its share buybacks to rebuild capital. The company appears to have a modestly higher risk profile, but the market apparently likes what it sees, as AXP is trading at 52-week high.
Management has reaffirmed its guidance of revenue growth of 8%-10% and adjusted EPS of $7.85-$8.35 (including the $0.21 litigation charge). Consensus estimates are in line with that guidance and anticipate that double-digit earnings growth will continue in 2020.
The company’s performance is benefiting from modest growth in billed business, driven mostly by increased card issuance, and its strategy to increase lending. The growth from these two sources is being partially offset by stepped-up marketing spending in what has been a very competitive operating environment. Although the increase in the loan book raises the company’s risk profile, its balance sheet and capital ratios have remained solid so far. Management asserts that the gains realized from these efforts will be sustainable, even though it seems like the growth in overall consumer spending cannot continue in the long run. Combined with modest stock buybacks and an increase in the dividend, shareholders have lifted the stock’s valuation multiple by a couple of notches over the past year.
Even with the recent increase, AXP’s forward multiple remains below the average of the market. Against peers, it trades at a premium to pure play card companies like Capital One (COF) and Discover Financial Services (DFS), but still at a big discount to the network providers, Mastercard (MA)and Visa (V) and at an even greater discount to online payments provider PayPal (PYPL). Continuing near-term gains in consumer spending may allow AXP to extend its earnings momentum and perhaps win it a higher valuation multiple; but I believe that these gains reflect an increasing risk profile for American Express.
April 29, 2019
Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250
admin@larkresearch.com
© 2015-2024 by Stephen P. Percoco, Lark Research. All rights reserved.
This blog post (as with all posts on this website) represents the opinion of Lark Research based upon its own independent research and supporting information obtained from various sources. Although Lark Research believes these sources to be reliable, it has not independently confirmed their accuracy. Consequently, this blog post may contain errors and omissions. Furthermore, this blog post is a summary of a recent report published on this subject and that report provides a more complete discussion and assessment of the risks and opportunities of any investment securities discussed herein. No representation or warranty is expressed or implied by the publication of this blog post. This blog post is for informational purposes only and shall not be construed as investment advice that meets the specific needs of any investor. Investors should, in consultation with their financial advisers, determine the suitability of the post’s recommendations, if any, to their own specific circumstances. Lark Research is not registered as an investment adviser with the Securities and Exchange Commission, pursuant to exemptions provided in the Investment Company Act of 1940. This blog post remains the property of Lark Research and may not be reproduced, copied or similarly disseminated, in whole or in part, without its prior written consent.