American Express Falls After Third Quarter Results

American Express (APX) is one of Warren Buffett's largest holdings. The company has been in his portfolio for over 20 years. American Express has been very profitable over the last 50 years. The company produces charge cards, credit cards and prepaid cards for its clients. American Express has released its third quarter results which failed to meet analysts estimates. The company suffered a big hit on profits and revenues in the third quarter. American Express is suffering due to the strong dollar. The stronger dollar is hurting a lot of U.S. businesses with big exposure in international markets.
While the rest of the world is moving to devalue their currency in order to boost exports and do more QE, the U.S is moving to raise rates.

Investors weren't shocked by the continuing decline in net income and revenue, however, investors were shocked by how much revenues and net income fell. The headwind American Express is facing has lead to shares falling to $73/share. American Express saw its revenue decline 1.3% to $8.19 billion, failing to break even as investors were hoping. The company's revenues held up better than net income which fell by 14% to $1.27 billion or $1.24/share. Analyst were expected to see $1.31/share instead the company missed it by $0.07 cents.

American Express's double digit percentage decline was unnerving to investors who were expecting a more gradual decline. However, investors and analysts were wrong and the company is seeing larger than expected declines. The company is clearly suffering from the strong U.S. dollar. When you take out currency fluctuations, you see American Express revenues rise by 3.3% from the previous quarter last year. However, even after taking the dollar into account, the company saw moderate growth of 3% in the third quarter, down from 5% in the second quarter.

The company's double digit fall in net income was partially offset by the revenue growth. However, the company saw its net income from U.S. Card Services take an 11% fall in the third quarter. On the other hand, American Express International Card Services saw net income fall by more than a third on an 11% decline in revenues. Much of the decline in revenues for the company's international operations came from currency fluctuations. Clearly currency fluctuations are taking their toll on American Express, plus the continued decline in margins as well. Like the company's domestic and international operations, its Global Commercial Service saw a 26% decline in net income. However, the company's Global Network and Merchant Service segment saw an 8% increase in net income. American Express Global Network and Merchant segment was the only bright spot in the third quarter.

The company's management weren't surprise by bad results in the third quarter. During the earnings call, American Express CEO Kenneth Chenault said, "The quarter reflected the headwinds and challenges that we have been dealing with throughout this year," he went on to say, "against the backdrop of a challenging environment and an uneven global economy, we continued to move forward with initiatives to build our business for the years ahead."

Even though American Express is experiencing economic woes, management still believes that the company has better years to come. During the earnings call, Mr. Chenault reminded shareholders that next year their partnership with Costco will end. This will results in the company spending more on marketing, incentives, and technology to attract new cardmembers to replace the ones they will lose next year.  However, the company has entered into a new partnership with Sam's Club and is looking to expand with smaller merchants as well.

Despite the company's economic woes, management hasn't lowered its standards for cardholders. The company still seeks out customers with high-quality credit histories. Seeking out customers and clients with high quality credit has lead to write-offs only slightly rising. However, the problems that American Express could face if they cannot rise to the challenge will potentially result in the company losing its dominate over the global card industry.
Published on Nov 19, 2015
By Cody Eustice
Cody is a freelance writer who has been writing financial articles for various sites for over a year now. He is a value investor looking for companies that sell for far less than their estimated business value.

Copyrighted 2016. Content published with author's permission.

Posted in ...