American Express Q2 Earnings: Higher Spending, Card Fees Lift Net Income

American Express (NYSE:AXP) reported net income of $1.5 billion for the second quarter, an increase of 7% year-over year, which included gains from a transaction related to a joint venture for the company’s business travel operations. A 5% revenue increase over the prior year was also reported due to a mix of higher card member spending, higher net interest income and higher net card fees. ^[1] Expenses were up 2% year-over-year to $5.9 billion due to higher marketing and rewards costs and incremental investments directed towards new growth initiatives.

We estimate a price of $96 for the company’s stock, nearly 5% ahead of the current market price.

See our complete analysis of AmEx’s stock here

Growth In The U.S.

Total cards-in-force in the U.S. stood at 44.7 million for the second quarter, marginally increasing from 44.1 million in the previous year. Average basic card member spending was up by a healthy 8.6% year-over-year, while net interest income was $1.3 billion, up from $1.2 billion a year ago. ^[2]

The U.S. market is a major driver of the company’s overall performance, as it contributes more than half of the company’s total revenues. AmEx has a core customer segment falling in the bracket of $95,000-100,000 and above family income levels, who are likely to be higher spending consumers.

International Growth

Through its Global Network Services (GNS), AmEx has 42.5 million cards-in-force internationally. Total revenues, net of interest expense, saw a jump of 5% year-over-year from $1.4 billion to $1.5 billion. This increase was due to higher merchant-related revenues driven by an increase in cardmember spending, which went up from $2,942 in the previous quarter to $3,107 in the second quarter. The global card billed business grew over 8% year-over-year to $258.1 billion, an increase of 9% year-over-year on a reported as well as FX-adjusted basis.

We expect the growth from international markets to continue going forward, especially given the increased levels of investments by the company and the forging of new relationships with financial institutions in newer markets to issue third party cards. However, currency fluctuations will continue to pose a challenge to the company.

Global Business Travel Joint Venture Deal

The company recently announced a joint venture for its business travel operations, and the completion of that transaction resulted in a gain of $626 million ($409 million after-tax) in the quarter. The new entity, which will operate under the American Express Global Business Travel brand, is a 50/50 venture between American Express and an investor group led by Certares. AmEx has stated its plans to use the gains from the deal to invest and support new growth initiatives such as AmEx Everyday and American Express Serve. ^[3]

We are in the process of updating our model to reflect changes after the second quarter results.

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1. American Express Reports Second Quarter Earnings, Investor Relations [↩]
2. SEC 8-K Filing, July 29 [↩]
3. American Express Global Business Travel Joint Venture Deal Closed, Investor Relations [↩]