Yesterday, American Express Co. (AXP), also known as AmEx, reported first-quarter 2012 operating earnings of $1.07 per share that was modestly higher than the Zacks Consensus Estimate of $1.00 per share and 97 cents recorded in the year-ago quarter.
Meanwhile, net income from operations increased 7% year over year to $1.26 billion from $1.18 billion in the year-ago period. However, no extraordinary items were recorded during both the comparable periods.
AmEx continues to benefit from an improved credit quality with an increased usage of cards and fewer defaults, across all business segments. Higher spending, superior market network and moderate growth in loan portfolio also drove the net interest income after several quarters. However, lower tax rate and healthy top-line and earnings growth were partially offset by higher-than-expected provision for losses and expense growth and lower return on average equity (ROE).
AmEx’ total billed business, or global card spending, continued to witness improvement in the U.S. and beyond climbing 12% year over year to $211.2 billion. The increase came from international cards-in-force that rose about 11.0% year over year to $47.8 million while cards-in-use grew 3.0% year over year in the US.
Behind the Headlines
AmEx posted total revenue, net of interest expenses, of $7.61 billion, up 8% year over year from $7.03 billion. The revenues edged past the Zacks Consensus Estimate of $7.57 billion. Additionally, the upside in revenues was supported by higher spending and moderate growth in both net interest income and the loan portfolio. Besides, lending balances and yield exhibited stability.
Provisions for losses were $412 million, surging 325% from $97 million in the prior-year quarter. The increase was driven primarily by larger reserve release in the year-ago period, partially offset by lower net write-offs in the reported quarter.
However, total expenses of AmEx climbed 4% year over year to $5.43 billion in the reported quarter, reflecting an escalated cost of card member services and other operating expenses that were partially offset by radical decline in market and promotion expenses and card member rewards. However, tax rate witnessed a reduction across most business segments as the company realized some foreign tax credits.
Segment Results
U.S. Card Services reported a net income of $752 million, up 35% from $555 million incurred in the prior-year quarter. Total revenue, net of interest expenses, increased to $3.9 billion from $3.6 billion, up 9% year over year.
International Card Services‘ net income came in at $197 million, climbing 4% from $189 million in the year-ago quarter. Total revenue, net of interest expenses, were $1.3 billion, up 8% from the year-ago quarter, driven by higher card member spending and revenues related to Loyalty Partner acquisition.
Global Commercial Services‘ net income dropped 4% to $177 million from $184 million in the prior-year quarter. Total revenue, net of interest expense, increased 3% year over year to $1.2 billion, reflecting increased spending by corporate card members, partially marred by higher client incentives and lower travel commissions and fees.
Global Network & Merchant Services reported a net income of $357 million, up 14% from $313 million in the prior-year quarter. Total revenue, net of interest expense, increased 10% year over year to $1.2 billion.
Corporate & Other reported net loss of $227 million compared with a net loss of $64 million a year ago. The results in the year-ago quarter included $70 million and $150 million from the Visa Inc. (V) and MasterCard Inc. (MA) settlements.
Financial Update
As of March 31, 2012, AmEx’s total assets stood at $152 billion (down from $153 billion at end of 2011), while long-term debt totaled $57 billion (down from $60 billion) against cash of $27 billion (up from $25 billion). Besides, shareholder’s equity totaled $20 billion at the end of the reported quarter, up from $19 billion at 2011-end.
As of March 31, 2012, AmEx’ ROE was 27.1%, slightly down from 27.9% in the year-ago period. Return on average common equity (ROCE) was 26.8%, dipping from 27.6% in prior-year quarter. Besides, return on average tangible common equity was 35.0%, also down from 35.6% in the comparable quarter last year. However, book value increased 17% year over year to $17.08 per share.
Capital Deployment Update
AmEx has pulled itself out of the recession well before its rivals, owing to its creditworthy customers, while its spend-centric model has also improved its overall risk profile. Besides, there has been an impressive recovery in credit trends, with increased card spending and strong billings over the past year. Going ahead, the company appears to initiate disciplined expense management with the extinguishment of the settlement payments with MasterCard and Visa that ended in 2011.
These factors have also helped AmEx achieve the no objection status from the Federal Reserve against its capital distribution plan, whereby the board of the company sanctioned the repurchase of shares up to 150 million from time to time. This replaces the prior 200 million share buyback program that had about 38 million shares available for repurchase. AmEx projects to buyback shares worth $4 billion in 2012 followed by another $1 billion in 2013.
Moreover, the board of AmEx also hiked its regular dividend per share by 11% to 20 cents from the prior 18 cents, which was sustained even during the recent recession period. The hiked dividend will be paid on May 10, 2012 to shareholders of record as on April 5, 2012.
Our Take
Despite a challenging regulatory environment and volatile economic outlook that sparks near-term caution, AmEx is expected to continue to create valued accretion in its interest income and loan portfolio. We believe that the company’s focus on product diversification such as no-fee prepaid cards along with other innovative card products is contributing to the upside.
Moreover, AmEx has been upgrading its digital payment platform through strategic alliances, which is not only expanding the company’s card membership base but is also helping it penetrate the unexplored market and tap the upcoming opportunities in the field of e-commerce. As a result, we maintain our long-term Neutral stance on the stock with a Zacks Rank #2, which implies a short-term Buy recommendation.
On Wednesday, the shares of American Express closed at $58.04, up 0.2%, at the New York Stock Exchange.
