American Express Earnings Preview: Holiday Spending In Focus

January 20th, 2015 by Trefis Team
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AXP: American Express Company logo
AXP
American Express Company

American Express (NYSE:AXP) is scheduled to report earnings for the fourth quarter of 2014 on Thursday, January 21. [1] The fourth quarter is expected to show some positive momentum because of the holiday spending. Consumer sentiment improved in 2014, largely driven by falling gas prices and lower unemployment. As a result, consumer spending increased during the holiday season compared to spending in the same quarter last year. Over the period, AmEx also focused on capitalizing on the growing mobile payment sector in the U.S.

AmEx earns approximately 76% of its revenues from transaction and execution fees charged to merchants. These fees are based on a percentage of the dollar value of transaction on American Express cards. AmEx’s transaction volume is mainly derived from the U.S. market; therefore the performance of the U.S. economy is strongly correlated to earnings. In this article we review the key trends in the U.S. that we expect will impact AmEx’s performance in the final quarter.

We have a price estimate of $102 for AmEx, which is about 15% higher than the current market price.

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Increasing Online Presence

E-commerce played a huge role in driving the increase in consumer spending in the fourth quarter. ComScore reported that online sales from Nov 1 to Dec 1 increased by 16% compared to the same period last year. [2] Thanksgiving through Cyber Monday generally marks the highest period of consumer spending in the year for both brick-and-mortar and online stores. According to a report published by IBM, online sales increased by 12.6% for the five-day period between Thanksgiving and Cyber Monday. [3] During the same period, mobile sales increased by 27%. However, the average sale amount was down by 3.5% year-over-year, to $124.21. The data suggests that overall spending has increased over the last year. According to the latest American Express Spending and Saving Tracker, around 64% of Americans planned to shop the day after Christmas. Although this was the same as 2013, consumers were expected to spend an average of $192 on December 26 in 2014, up $4 from the same date in 2013. [4] The survey was comprised of adults that had a minimum annual household income of $100,000. The annual household income is in line with the income of target AmEx cardholders. As AmEx has a spend-centric model, it derives revenues from the dollar value of transactions. A higher spend per consumer is a positive sign for the company.

Mobile Penetration

For the first time, in this holiday season there were more consumers on the mobile platform than PCs. [2] Mobile traffic comprised 52.1% and 41.2% of all online visits on Thanksgiving and Cyber Monday, respectively, and increased by 30.1% year-over-year. Twenty-two percent of the total online sales made on Cyber Monday were made through the mobile platform, a year-over-year increase of 27.6%.

Through the end of September, the company had witnessed a 37% year-over-year increase in its mobile app downloads. [5]  In the last quarter, AmEx collaborated with Apple Pay and Uber. As many AmEx cardholders are avid users of Apple products, AmEx’s partnership with Apple Pay to support the upcoming mobile payment technology is likely to benefit the company in the near future. [6] As a part of the strategy, AmEx also launched a token service to provide customers with a secure online payment mechanism for mobile. [7]

Improving U.S. Economy

The continued economic recovery has led to improved consumer sentiment. According to the Bureau of Economic Analysis, Real DPI increased 0.3% and 0.5% in October and November, respectively. [8] Personal Consumption Expenditures also increased by 0.2% and 0.7% in October and November, respectively. In the near term, we expect that improving economic conditions will likely drive consumer spending further, which will benefit the credit card industry.

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Notes:
  1. Q4 2014 American Express Earnings Conference Call, Investor Relations [↩]
  2. Cyber Monday Exceeds $2 Billion in Desktop Sales for First Time Ever to Rank as Heaviest U.S. Online Spending Day in History, Comscore [↩] [↩]
  3. Cyber Monday Caps Record Five-Day “Cyber Week” Driven by Mobile Shopping, According to IBM Digital Analytics Benchmark, IBM [↩]
  4. Last-Minute Shoppers Spread Holiday Cheer, Press Release [↩]
  5. American Express Company at Goldman Sachs U.S. Financial Services Conference, Investor Relations [↩]
  6. American Express CEO Pleased With Holiday Spending Trends, Wall Street Journal [↩]
  7. American Express Introduces New Online and Mobile Payment Security Services, Press Releases [↩]
  8. Personal Income And Outlays: November 2014, Bureau of Economic Analysis [↩]