American Express Earnings Preview: What We’re Watching

American Express (NYSE:AXP) will report earnings for the first quarter of 2013 Wednesday, April 17. ^[1] The company has showed solid bottom line growth throughout the year despite one-time expenses including a $400 million restructuring charge related to the changes in the travel services division and a $342 million expense due to enhancements to the Membership Rewards estimation process that impacted fourth quarter earnings, leading to a 47% year-on-year decline in net income. Net revenues for 2012 were up 5% over 2011, as American Express’ spend-centric model and closed loop network kept it in good stead. We expect the company to maintain the momentum it gathered last year with solid bottom and top line growth in the first quarter.

Our $63 price estimate for the company’s stock is in line with the current market price.

See our complete analysis of AmEx’s stock here

American Spending

Around 30% of American Express’ net revenues come from transaction fees charged from merchants accepting its cards in the U.S. The company has over 31 million propriety cards in circulation across the country, which generated a transaction volume of $470 billion in 2012. The average discount rate charged from merchants by American is 2.52%, which is higher than the industry average of 2%. American Express is able to charge a higher rate from merchants on faith of its promises to bring them higher spending customers. The annual average spend per AmEx card is around $15,000 while the figure for Visa (NYSE:V) and MasterCard (NYSE:MA) is around $2,000. The main reason for this higher spending is that American Express primarily targets affluent customers, the average AmEx household earns about $97,000 per year ^[2].

American Express reported a 7% year-on-year increase in card billed business in the U.S. for the fourth quarter of 2012, 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 as the company maintained growth even under uncertain economic circumstances. We believe that the company can maintain this growth in the coming years. Read our article: Analyzing American Express’ Spend Centric Model And Future Growth Potential for more details.

Loans

Interest income from credit loans accounts for 15% of American Express’ revenues. The company was able to turnaround a two year decline in average loan balance per card member in the U.S. in 2012, showing 2% growth. This metric is largely governed by macroeconomic factors. The total revolving credit owned and securitized, outstanding across the U.S., fell from over $1 trillion in 2009 to $840 billion in 2011, a 16% decline, but stabilized around $850 billion in 2012, as the U.S. economy showed signs of recovery. In line with this trend, American Express reported an 8% decline in its loan balance in the U.S. from 2009 to 2011, but reported a 5% growth in 2012. With a recovery in the U.S. economy and increased consumer spending, we expect American Express’ loan balance to grow over the next few years.

Growth In Third-Party Cards

Outside the U.S., American Express is moving away from its closed loop network, relying on third-party issued cards carrying the company’s signature logo for growth. In 2012, almost 80% of the American Express branded cards issued outside the U.S. were issued through third party financial institutions in agreement with the company’s global network services (GNS) division.

Transaction fees earned through third-party issuers have increased by a compound annual growth rate of 15% higher than the CAGR of 9% for propriety cards in the U.S. Revenues earned through third-party issuers accounted for 15% of the company’s gross revenues in 2012, indicating the importance of this business. We expect a double-digit growth rate for third party cards in the coming years. Read our article: Why American Express Is Growing Its Third Party Issued Cards Business for more information.

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1. Q1 2013 American Express Company Earnings Conference Call, Investor Relations [↩]
2. Spending by affluent helps Amex to strong quarter, Yahoo News, April 18^th, 2012 [↩]