American Express Likely To Report Subpar Full Year Results Despite Strong Q1

by Trefis Team
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American Express Company
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American Express (NYSE: AXP) reported a resounding earnings beat for the first quarter of the year last week, with the card lender overcoming seasonal headwinds to churn out its best ever quarterly revenue figure thanks to an upbeat interest rate environment as well as due to its acquisition of a portfolio of Hilton co-branded cards from Citigroup. We have summarized American Express’s Q1 2018 earnings and also detailed the major takeaways from the announcement in our interactive dashboard for the company, the key parts of which are captured in the charts below.

While American Express witnessed sizable organic growth in its card portfolio as well as payment volumes, this growth was accompanied by a significant increase in expenses related to cardmember rewards and services. These expenses increased from $2.38 billion in Q1 2017 to $2.76 billion in Q1 2018 – a jump of 16%, which is well above the 12% increase in revenues y-o-y. Additionally, total loan provisions were also elevated for the quarter. We attribute these trends to American Express’s new growth strategy which seeks to attract more merchants and more card users by slashing transaction fees and by offering larger rewards, respectively. While this strategy should help American Express unlock sizable value in the long run, we expect it to weigh on the bottom line over the next couple of years. Because of this, we stick to our $105 price estimate for American Express’s stock, which is slightly above the current market price.

See our full analysis for American Express here

Growing Card Balances, Improved Interest Rates Boosted Interest Income

The rate hikes implemented by the Fed have helped the interest rate environment in the country recover steadily from the record low levels seen over 2014-15. The ongoing rate hike process helped American Express’s net interest yield on card loans increase from 10.3% in Q1 2017 to 10.8% in Q1 2018. At the same time, American Express gained from its acquisition of a portfolio of Hilton co-branded cards from Citigroup which boosted the total size of its card portfolio. Taken together, this helped quarterly net interest income for the company cross $1.8 billion for the first time ever.

Growth In International Card Payment Volumes Outpacing Growth In The U.S.

The first quarter of a year is seasonally the slowest period for the cards and payments business, with the fourth quarter being the strongest period. Taking this into consideration, there was a smaller-than-expected reduction in total card payment volumes for American Express in Q1 2018 compared to the previous quarter. While the addition of the Hilton portfolio would have helped this figure, there has been a notable uptick in the share of international payment volumes. International payments now account for almost 36% of Amex’s total volumes – up from around 34% a year ago.

Charge Card Balances Growing At Slower Rate Than Card Loans

Another important trend seen in American Express’s results over recent quarters is the faster increase in credit card loans outstanding compared to charge card balances. While both these card categories have seen healthy growth, the company stands to gain more from faster credit card loans, as these generate interest revenues as well as fee revenues – as opposed to charge cards, which only generate fee revenues. At the end of Q1 2018, Amex reported $54.2 billion in charge card balances globally, which the total credit card outstanding was $72.8 billion.

We expect American Express to report EPS of $7.24 for full-year 2018. Taken together with a P/E ratio of 14.5 (which we believe is appropriate for the card lender), this works out to a price estimate of $105 for Amex’s shares, which is slightly ahead of the current market price.

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