American Express (NYSE:AXP) reported a 47% year-on-year decline in net income for the fourth quarter of 2012, influenced mostly by one-time expenses. These included a $400 million restructuring charge related to the changes in the travel services division, a $342 million expense due to enhancements to the membership rewards estimation process and a $153 million expense related customer reimbursements for prior years. Apart from these expenses, which will help operations going forward, the company had a strong performance in the fourth quarter as net revenues increased by 5% over the prior year. American Express also reported a 5% increase in net revenue for the fiscal year, helped by increased spending in the U.S. and abroad.
Our $62 price estimate for the company’s stock is in-line with the current market price.
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American Express reported a 7% year-on-year increase in card billed business in the U.S. for the fourth quarter, complemented by a 5% increase in spend per card in the country. American Express issued cards in the U.S. increased from 30.4 million to 31.3 million over the year. Amex charges a transaction fee of about 2% from merchants accepting its cards in the U.S. Around 30% of the company’s net revenues are earned from transaction fees in the country, and the fact that it has been able to sustain growth even in uncertain economic circumstances, places the company in a good position going forward.
Taking On Incumbents
Unlike Visa (NYSE:V) and MasterCard (NYSE:MA), American Express has traditionally issued most of its cards through its own banking subsidiaries. However, in the last three years, there has been a substantial increase in cards issued by third-party banks and financial institutions bearing the Amex logo through the Global Network & Merchant Services division. The company has maintained a double-digit growth rate in third-party issued cards, which now stand at 37.6 million, close to the total cards issued by American Express itself. Amex also reported a 12% growth in billed business through the fourth quarter and a 10% growth through the fiscal year. American Express earns a commission close to 3.5% of the transaction volume from its third-party issued cards and the total income from this division accounts for about 13% of the company’s net revenue.
We believe that the growth rate will eventually slow down, but this is an exciting prospect for the company going forward. There is a potential 10% upside to our price estimate should American Express maintain the double-digit growth rate in third-party issued cards through the next few years.
International card services account for 17% of American Express’ revenues. The company reported a 9% growth in billed business outside the U.S. for the fourth quarter, with an 8% increase in cards-in-force. This was helped by strong growth in Japan, Australia, Germany, U.K. and Latin America. We expect the company to maintain international growth in the coming years.
American Express is restructuring its travel services division to focus more on online and mobile bookings. The company estimates around 5,400 job cuts as a result of this operation and had to incur a $400 million charge in the last quarter due to this. However, the overhaul will lead to lower operating expenses and will free up resources for growth. The total travel sales by the company are around $25 billion, on which Amex charges a commission of around 8%. About 80% of the travel sales are to corporate clients. Commissions from travel sales account for just 7% of the company’s revenues.