American Express 18Q1 Results: The Momentum Continues

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
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