American Express (NYSE:AXP) is expected to announce results for the second quarter of 2013 on Wednesday, July 17.  The improving global economic conditions and strong consumer spending helped the company report an 8% year-on-year increase in pretax earnings for the first three months of the year. The U.S. division, which accounts for more than half of Amex’s revenues, reported a 5% increase in revenues net of interest expense while the pretax income jumped 8% through the first quarter. We expect the company to maintain its growth momentum in the past quarter as well.
Our $63 price estimate for the company’s stock implies a discount of 15% to the current market price.
Targeting The Affluent In The U.S.
- What Is American Express’ Revenue & Expense Breakdown?
- How Much Did American Express’ Revenue & Net Profit Grow In The Last Five Years?
- What Is American Express’ Fundamental Value Based On Expected 2016 Results?
- Where Is American Express’ Revenue Growth Over The Next Five Years Going To Come From?
- How Has American Express’ Revenue Composition Changed In The Last Five Years?
- How Much In U.S. Card Purchase Volumes Did The Country’s Largest Card Issuers Report In 2015?
American Express is usually associated with affluent customers. The average Amex household earns about $97,000 per year.  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 company employs a closed-loop model wherein it acts as both the acquirer or merchant’s bank and the issuer or the cardholder’s bank. By doing so, Amex not only collects discount fees from merchants accepting American Express cards but also earns interest income from credit loans issued to cardholders.
The company has 31.3 million propriety cards-in-use in the U.S. According to the 2010 U.S. census, around 22% of the households in the U.S. earn more than $95,000 per year.  These households form the customer base for American Express. Extrapolating this figure to 2012, we get nearly 69 million Americans who would qualify as potential American Express customers, giving the company a penetration of 45%. For more analysis on the company’s prospects in the U.S., please read How The Recovering Economy Could Drive Growth For American Express
By targeting affluent customers who are likely to spend high amounts and are less likely to default on a credit loan, American Express mitigates the risk of credit default. Amex’s delinquency rate or the percentage of total loans that are past due date on credit card loans is 0.36% for loans 30-59 days past due date, 0.27% for loans that are 60-89 days past due date and 0.59% for loans that are more than 90 days past due date. This is far ahead of the industry average, the delinquency rate for all commercial banks in the U.S. was around 2.73% in the fourth quarter of 2012. 
The company has maintained a market share of 6% of the total revolving credit owned and securitized, outstanding across the U.S. through the last four years. The total revolving credit loans in the U.S. fell from around 9.6% of the country’s gross actual disposable income in the pre-recession period to around 7% in the last three years.  However, the U.S. economy is now on the road to recovery, highlighted by the remarkable decline in unemployment rate from the peak of 10.1% observed during the financial crisis in 2009 to a four-year low of 7.5% in April, staying at 7.6% in May and June. This decline in unemployment indicates a general recovery in the job market, which will lead to higher disposable income and subsequently higher spending.  For more, please read: Key Drivers To American Express’ U.S. Interest Income Growth
Third Party Model Used For International Growth
Outside of the U.S., American Express is moving away from its closed loop network. Almost 80% of the American Express branded cards issued outside the U.S. in 2012 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 grown by a compounded annual growth rate of 15%, higher than the CAGR of 9% for propriety cards in the U.S. over the last four years.
American Express has independent operator agreements in Brazil, Russia, Indonesia, Turkey and Ecuador. It has 77 network card license agreements including those with Lloyds TSB Bank in the United Kingdom and Westpac Banking Corporation in Australia. The company also has joint venture agreements in Switzerland and Belgium. The company’s third party strategy allows it to expand its presence in countries with established institutions expands its cardmember and merchant base at cost levels that would not have been feasible on its own. Revenues from third party cards currently account for 15% of the company’s total revenues, we expect this percentage to increase to 20% by 2019. Please read our article: Why American Express Is Growing Its Third Party Issued Cards Business for more on growth prospects related to third party issued cards.Notes:
- Upcoming Events, Investor Presentations, Investor Relations [↩]
- Spending by affluent helps Amex to strong quarter, Yahoo News, April 18th, 2012 [↩]
- Annual Social and Economic (ASEC) Supplement, United States Census Bureau [↩]
- Delinquency Rate On Credit Card Loans, All Commercial Banks, Board of Governors of the Federal Reserve System [↩]
- Disposable personal income, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]