American Express (AXP) Tops Street Expectations on Strong Affluent Spending

On Wednesday, credit card giant American Express (AXP: Charts, News) topped Wall Street expectations with strong first quarter earnings fueled by increased spending from its affluent customer base. The firm reported first quarter net income of $1.3 billion, a 7% increase from the prior year quarter.

Diluted earnings per share rose 10% from 97 cents to $1.07. Analysts had expected the company to earn $1.01 per share. Revenue also grew by 8% to $7.6 billion. American Express has rallied 23% year-to-date, and has been the fourth best performing Dow component in 2012. Daily Chart
American Express' strong earnings also bode well for luxury retailers, which have outperformed less expensive peers in times of economic recovery. High-end retailers boosted the firm's income in the U.S. by 35% to $752 million. International card income rose 4% to $197 million. The firm has been trying to preserve its bottom line by reducing its marketing, promotions and rewards to cardholders by 14%. Over the past year, American Express had been aggressively offering higher rewards to fend off competing card issuers such as JPMorgan Chase (JPM: Charts, News). American Express also reported the lowest write-off rates in its industry - signaling low risk ahead for shareholders. The firm's non-performing loans dropped to an industry best of 2.3% for the quarter, down from 3.7% a year earlier. American Express differs from Mastercard (MA: Charts, News) and Visa (V: Charts, News) in that it is also a bank. Mastercard and Visa are "payment processors" which make money on individual transactions, but the liability of soured loans is passed on to the issuing bank. Meanwhile, American Express shoulders the loans itself with its financial arm - a key difference that sunk the company to $10 per share during the depths of the 2009 financial crisis. During recent stress tests, the Federal Reserve concluded that American Express was among the 19 best-equipped banks to withstand a severe recession. The firm also increased its loan loss reserve to $412 million, up four fold from $97 million a year ago. American Express claimed 25% of the $2.05 trillion in U.S. credit card purchases last year. Its closest competitor is JPMorgan, which issues cards under multiple payment processors, at 18%. CEO Kenneth Chenault was upbeat regarding the firm's 2012 prospects, stating, "Higher cardmember spending, excellent credit metrics and disciplined expense management helped us to start 2012 with record first-quarter earnings and revenues." Last month, American Express raised its quarterly dividend by 11% to 20 cents per share. It also announced a possible stock buyback plan of $5 billion, which is subject to change if acquisition opportunities appear. "It's really a tradeoff between acquisition spending and buybacks," stated CFO Dan Henry. "The less we do in acquisitions, the more we will do in buybacks." Looking forward, Chenault has launched a new electronic wallet system for smartphones, tablets and computers in an effort to cash in on a market revolutionized by eBay's (EBAY: Charts, News) PayPal. The new system, called Serve, is also aimed at attracting customers who prefer debit cards, as it only deducts from a cash balance. Serve is also intended to compete against Visa, Mastercard and China's UnionPay, all of which are larger than the fledgling network. Shares of American Express trade at 12.2 times forward earnings with a 5-year PEG ratio of 1.4. By comparison, JPMorgan trades at 7.8 times forward earnings with a 5-year PEG ratio of 1.2. American Express currently pays a 20 cent quarterly dividend, and based on its consistent dividend growth over the past 24 years, is likely to increase its yield as its share price rises. Other News About AXP AmEx Profit Increases as Spending Rises, Defaults Improve American Express posts stronger than expected earnings. Higher consumer spending boosts AmEx profit Affluent consumers boost the firm's income. Other Stocks in the News AAPL: Goldman Raises FYQ2 View on iPhone, iPad; Ups Target to $750 Apple gets upgraded, albeit more conservatively. Yum Brands posts whopping 1st-qtr profit gain Yum posts a 73% increase in profit on growth in the U.S. and China. 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Published on Apr 20, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

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