Higher Spending, FX Headwinds Impact American Express’ Earnings

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AXP: American Express Company logo
AXP
American Express Company

American Express (NYSE:AXP) announced its fourth quarter and full year 2014 earnings on Wednesday, January 21.  The company reported an 11% year-over-year increase in net income to $1.4 billion, resulting in a 15% year-over-year rise in EPS for the quarter. Total revenues, net of interest expense, jumped from $8.5 billion in the fourth quarter of 2013 to $9.1 billion in 2014. [1] AmEx benefited from higher cardmember spending and an increase in net interest income, while FX headwinds impacted earnings from its international operations. A gain of $719 million in revenues that came from the sale of the company’s stake in Concur Technologies also impacted the results. The fourth quarter earnings also included revenues from the company’s business travel operations, which AmEx has deconsolidated by forming a joint venture with an investor group led by Certares. [2]

Below we take a closer look at the company’s performance numbers for the final quarter of 2014. We have a price estimate of $102 for AmEx’s stock, which is about 20% higher than the current market price.

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Higher Spending Lifts Revenues, Net Income Declines In The U.S.

There was no change in AmEx’s net income in 2014 when compared with 2013. However, the total revenue increased by 5% for the full year 2014. [3] In the last quarter, the company reported a 23% year-over-year decline in net income to $665 million. This sharp decline in net income can be attributed to a 25% increase in provisions for losses and an increase in marketing and promotional expenses. Overall, there was a 13% year-over-year increase in total expenses in the quarter.

In the quarter, the total revenue increased by 5% to $4.6 billion. The increase in revenue was mainly driven by a rise in cardmember spending by 8%. The total volume of card spending crossed $1 trillion for the first time. Since AmEx operates a spend-centric business model, its earnings are dependent upon the volume of dollar transactions. The company reported an 8% year-over-year rise in billed business in the last quarter. In the last quarter, the total number of cards-in-force grew by 4% year-over-year to 42.6 million and the average cardmember spending in the U.S. increased by 4% year-over-year to $4,686. Interest income also grew by 5% to $1.4 billion as the total loan balance also increased.

International Operations Hit By FX Headwinds

Currently AmEx has a total of 47 million cards in force in the international market (outside the U.S.) through its global network and merchant services. Due to its exposure to international markets, AmEx is affected by fluctuations in currency exchange rates. During the last quarter, specifically in Japan, the company suffered from FX headwinds. This had a negative impact on earnings and the company reported only a 7% year-over-year growth in billing business from the region, compared to 14% year-over-year on an FX-adjusted basis.

Another significant development is the loss of business in Canada as Costco (NYSE:COST) dropped AmEx as its card partner in its Canada stores. [4] Going forward, we expect this to adversely impact growth in AmEx’s billed business, especially as Costco is considering dropping AmEx in the U.S. as well.

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Notes:
  1. American Express EPS Up 15% for the Quarter; 14% for Full Year; Cardmember Spending and Loans Rise; Investment Gain Used for Business Building Initiatives and Restructuring, Press Release []
  2. American Express Global Business Travel Joint Venture Deal Closed, Press Release []
  3. Form 8-K, SEC Filings []
  4. Costco Weighs Dropping AmEx as U.S. Card Partner, Bloomberg []