American Express Earnings Beat Analyst Expectations, FX Headwinds Impact Business

-23.07%
Downside
228
Market
175
Trefis
AXP: American Express Company logo
AXP
American Express Company

American Express (NYSE:AXP) announced its Q1 2015 earnings on Thursday, April 16. The company reported a 6% year-over-year (y-o-y) increase in net income to $1.5 billion, resulting in an 11% y-o-y rise in EPS for the quarter that beat analyst estimates. The increase in income was mainly driven by a rise in cardmember spending by 3% (FX adjusted 7%) and a moderate increase in its loan portfolio. Total revenues, net of interest expense, declined by 3% from $8.2 billion in Q1 2014 to $7.9 billion in Q1 2015. [1] FX headwinds continued to dampen earnings from the international market due to the strengthening of the dollar against major currencies such as the euro and the yen.

We have a $97 price estimate for American Express’ stock, which is around 20% above the market price.

See our complete analysis of AmEx’s stock here

Relevant Articles
  1. Up 25% YTD, What To Expect From American Express Stock?
  2. American Express Stock To Beat The Expectations In Q3
  3. What To Expect From American Express Stock?
  4. American Express Stock To Top The Consensus In Q2
  5. American Express Stock Is Attractive At The Current Levels
  6. American Express Stock To Post Mixed Results In Q4?

Strong U.S. Economy Drives Card Member Spending and Loan Portfolio

Around 28% of AmEx’s net revenues come from transaction fees charged from merchants accepting its cards in the U.S. AmEx reported an 7% year-on-year increase in card billed business in the U.S. in Q1 2015. This was complemented by a 4% y-o-y increase in AmEx issued cards in the U.S. to 34.2 million accompanied by a 2% increase in average card member spending. [2]

Net interest income, which accounts for 16% of total interest income for AmEx, increased by 8% y-o-y, backed by a growing loan portfolio. In this quarter, card member loans increased by 4% y-o-y to $66.8 billion as the U.S. economy continued to improve. The U.S. comprises of majority of the loan portfolio for AmEx.

The credit market is largely dependent on macroeconomic factors and consumer sentiment as these factors drive borrowing and spending. The unemployment rate in U.S. fell from 6.6% in January 2014 to 5.5% in Feb 2015, which consequently led to a rise in disposable income. [3] AmEx also maintained a charge-off and delinquency rate of 1.5% and 1%, respectively (in line with the historical levels). This is significantly lower than the market charge off rate of 3.04% for the last two quarters of 2014. ((Consumer Credit Outstanding (Levels)) An increase in consumer’s purchasing and borrowing power, along with a strong credit profile drove its card member spending and interest income this quarter.

International Operations Hit By FX Headwinds

Currently AmEx has a total of over 47.3 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, the company suffered from FX headwinds, specifically from Japan, with the strengthening of the U.S. dollar. Japan and Asia pacific, the fastest growing region for AmEx, had a negative impact on earnings. The company reported only a 6% year-over-year growth in billing business from the region, compared to 16% year-over-year on an FX-adjusted basis. On the other hand, Latin America & Canada (LACC) region slowed down, partly because of a decline in billings from the Canada region as the company terminated its co-branded relationship with Costco Canada.

Going forward, FX headwinds caused by strengthening of the dollar may continue to adversely impact growth in AmEx’s reported billed business.

The company estimates earnings to moderately decline or remain flat for the full year of 2015 as it plans on taking certain investment initiatives to mitigate the effect of prospective loss that Costco U.S. would have on the business. One such initiative, for which the company is optimistic about is Plenti-a loyalty program that will allow the customer to pay with loyalty points at participating retail stores. We will track any other strategies that the company would implement in the near future.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Press Release, American Express []
  2. Form 8-K, American Express []
  3. Bureau of Labor Statistics, U.S. Department of Labor []