American Express (NYSE:AXP) announced its first quarter earnings for 2012 on Wednesday, 18th April. The net income reported by the company was $1.3 billion, up 7% from $1.2 billion last year. Diluted earnings per share, also rose by 10% from $0.97 to $1.07. This positive result can be attributed mostly to the upturn in the economy, as the company reported 12% higher spending by its cardholders, compared to last year. The revenue reported was $7.6 billion, up 8% from $7 billion, last year. American Express uses a closed-loop network for its card transactions which gives its a competitive edge over its main competitors, Visa (NYSE:V) and MasterCard (NYSE:MA), that only process transactions.
Card Transaction and Execution
The first few months of the year saw an increase in spend in the retail sector as a healthy job market and a boost in economy saw consumers across the U.S. splurge on higher spending particularly in luxury stores, keeping in line with the healthy trend observed during the holiday season. As a large number of transactions are carried out via cashless mediums, this increased spending helped boost credit card companies and American Express in particular. American Express utilizes a spend-centric strategy, focusing on high spending customers. Card Transaction & Execution Fees constitute 71% of the Trefis price.
U.S. Card services reported a net income of $752 million showing an increase of 35% from last year, which can be attributed to increased spending and an increase in net interest income. On the basis of its strong performance, American Express increased their quarterly dividend by 11% to $0.20 per share. However, costs associated with services increased 35%, due to credits given out for travel fees to cardholders.
Although American Express tried to cut its expenses on marketing and promotion in the first quarter, the company will try to adjust its marketing to ward off increased competition in the industry, particularly from JPMorgan Chase, which like American Express, is also targeting the affluent customers across U.S.
We currently estimate a price of $51.25, 11% below the current market price.