American Express Q2 Earnings Preview: Growth Momentum Likely To Continue

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Trefis
AXP: American Express Company logo
AXP
American Express Company

American Express (NYSE:AXP) is expected to report earnings for the second quarter on Tuesday, July 29. In the first quarter this year, AmEx reported an increase of 7% for the foreign exchange (FX) adjusted billed business, as also the total cards-in-force and average member spending shot up by 4% and 3% over the prior year, respectively.  ((SEC 8K Filing, April 2014))

We have a price estimate of $96 for the company’s stock, which is slightly ahead of the current market price.

See our complete analysis of AmEx’s stock here

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High Spending Customers Are The Core Of AmEx Model

AmEx follows a spend-centric business strategy, which is built around affluent members, often falling in the $95,000 and above income bracket. AmEx holds less than 2% of the world’s total cards in-force, yet the company earned a staggering $33 billion in gross revenues in 2013 compared to $25 billion for Visa and MasterCard combined.

For the quarter ending March 2014, AmEx reported a 6% increase in revenues from the division for the first quarter, with total cards-in-force increasing 4% to 44.1 million and average basic cardmember spending up 3% over the prior year in the U.S.

American Express issues its own cards through its banking subsidiaries and employs a closed-loop network.  The company’s primary source of revenues is the discount fee charged to merchants who accept its cards. These fees are charged as a percentage of the charge amount processed for the merchant and account for 65% of the company’s revenues. The average payment volume per transaction for AmEx cards is around $150, while that for Visa is around $70.

We expect the growth to improve in the second quarter given the severe winter conditions in the U.S. that had a somewhat moderating effect on revenues in the first quarter.

Operations Outside The U.S.

For expansion outside of the U.S., AmEx has also deployed the third party model to expand its global card-member and merchant base at decreased costs compared to issuing cards on its own.  Through its Global Network & Merchant Services (GNS) division, the company invites established financial institutions to issue cards carrying the signature American Express logo and also to act as merchant acquirers.

In the previous quarter these cards grew by 8% to 41.3 million, alongside a 10% (15% on an FX adjusted basis) growth on card billed businesses. Majority of growth was witnessed in the Japanese and the Chinese markets, although strengthening of the U.S. currency against the Japanese Yen did offset this rising crest. [1] Since American Express also issues loans, the company will always be susceptible to currency fluctuations, a risk factor impacting growth.

We will be closely following the trends emerging from the international operations to gauge the impact it will have on the overall company performance for the remainder of the year.

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