American Express (NYSE:AXP) is expected to report its earnings for the fourth fiscal quarter of 2012 on Thursday, 17th January. The card-processing company performed well in the first three quarters of the year, reporting 6% year-on-year growth in billed business, total cards-in-force and cardmember loans at the end of the September quarter. We expect Amex to maintain this momentum with strong earnings in the fourth quarter.
Our $62 price estimate for the company’s stock is in-line with the current market price.
High Spend From Affluent Customers
Although American Express lags peers Visa (NYSE:V) and MasterCard (NYSE:MA) in terms of cards-in-force with just 1.5% of the world’s payment cards carrying the Amex logo, its strategy to offer cards to affluent customers allows it to maintain a high market share in terms of total spending on the cards. American Express accounted for 25% of credit-card spending in the U.S. in 2011.  The company reported a 5% increase in average basic cardmember spending in the U.S., reaching $3,725 at the end of the September quarter. This growth was complemented by a 6% increase in total cardmember loans and an 8% increase in billed business.
American Express charges a transaction fee of close to 2% of gross dollar value of a transaction from the merchants accepting Amex cards and earns a yield of about 9% from credit card loans in the U.S. We expect a steady growth in spending volume and customer loans in the U.S. going forward.
Expansion Outside The U.S.
American Express reported 9% growth in cards-in-force outside the U.S. at the end of the third quarter. However, the average spend per customer was much lower outside the country at just $3,026, with a growth rate of less than 3%. The company has stated its intention to expand in high-growth economies, particularly in Asia and will have to work hard to establish a brand image like it has done in the U.S. We maintain an optimistic stance on the company’s international expansion, but you can modify the interactive chart below to gauge the effect a slower cardmember spend growth rate outside the U.S. will have on our price estimate.
The company recently announced that it will be restructuring its travel services division to focus more on online bookings rather than bookings through travel agents.  This overhaul will lead to around 5,400 job cuts but will not have a big influence on American Express’ operations. Commissions from travel sales account for just 7% of the company’s revenues. Total travel sales by the company are around $25 billion, on which Amex charges a commission of around 8%. About 80% of its travel sales are to corporate clients.Notes:
- AmEx Profit Meets Estimates as Card-Spending Growth Slows, Bloomberg Businessweek, 18th October, 2012 [↩]
- Travel Cuts at AmEx Point to End of Era, The Wall Street Journal, 13th January, 2013 [↩]