American Express (NYSE:AXP) announced earnings for the second quarter of 2012 on Wednesday, 18th July, reporting a net income of $1.3 billion.  Revenue increased 5% year-on-year to $7.97 billion, even as economic uncertainty in the U.S and Europe took its toll on consumer confidence. We discuss below a few trends that influence our valuation of the company’s stock.
Consumer Spending Dampened But Still Growing
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Although slowed down a little by the negative macro-economic outlook, consumer spending continued to grow through the last quarter. American Express strategy of targeting affluent customers through its spend-centric model paid off, as billed business grew by 9% over the quarter. Although this figure is down significantly from the 15% growth observed in the second quarter of 2011, it still represents a healthy rate. The company was also able to maintain historically low loan delinquency rates, which dropped from 1.5% last year to 1.2%. Net charge-off rate also dropped 1% year-on-year.
Amex has recently unveiled plans to adopt Europay MasterCard (NYSE:MA) Visa (NYSE:V) (EMV) compliant cards and processors across the U.S. (See American Express Headed For $60 With Plans To Adopt EMV Technology) which will allow it to increase merchant acceptability and thereby attract market share. These processors will facilitate processing of diverse payments methods including PIN, signature, contactless and mobile transactions.
Competitors Visa and Mastercard are also likely to allow merchant surcharging on their cards, in the next few months. (See Visa And MasterCard Face The Heat To Reduce Fees) This will bring them on-par with American Express, which allows merchants to surcharge customers as long as they apply the same for other processing networks.
We expect cardmember spend on Amex-Issued cards to increase at a healthy but not overoptimistic rate over the next few years.
Growth In Cards
American Express’s cards-in-force grew 6% year-on-year to $100 million. Global Network Services (GNS) cards grew by 15%, whereas propriety cards grew by 2%. Europe, despite being on a knife’s edge, economically, reported positive growth of 4% led by Germany and U.K. which reported 5% and 4% growth respectively. Spain, which is heading for a bailout, reported a decline of 5%. This healthy trend can again be attributed to American Express’s marketing strategy, which is designed to promote spending through affluent customers.
Even though Amex charges significantly higher fees from merchants than its competitors, it offers them high spend customers who are more likely to purchase goods. American Express charges 4.2% for a $30 tank of gasoline in the U.S., whereas Visa would charge 2.3% and MasterCard 1.9%.  The company’s monetization strategy is based on spend potential and not volumes, which are prone to stagnancy in case a customer hits his or her spend limit. We expect the American Express’s strategy to pay-off with a continued increase in cards-in-use.
We currently estimate a price of $60, concurrent with the current market price. You can gauge the effect of a change in forecast by modifying the interactive charts above.Notes:
- American Express Management Discusses Q2 2012 Results – Earnings Call Transcript, Seeking Alpha, 18th July, 2012 [↩]
- American Express Credit Card, The True Cost of Credit [↩]