American Express (AXP – Free American Express Stock Report), a Dow-30 component and one of the world's largest issuers of credit cards, has reported June-period financial results. For the quarter, the company achieved share earnings of $1.84, which were $0.04 above our estimate and represented a year-over-year gain of 25%. Following the news, shares of American Express traded modestly lower.
Additional details of the June quarter were, overall, quite positive. Total revenues net of expenses were $10.0 billion, or 9% higher than the previous year's tally. The healthy increase stemmed from higher card member spending from consumers, small businesses, and corporate accounts. Higher loan volumes and fee income also bolstered the top line. On the other hand, consolidated expenses climbed 7%, to $7.1 billion, which reflected greater rewards costs and marketing initiatives. Also, the provision for loan losses expanded 38%, to $806 million. The rise was attributed to the growing loan portfolio and an increase in lending write-off and delinquency rates. That said, credit quality remained high and should not be much of a concern.
Looking ahead, we remain bullish in regard to Amex's operations. As the June quarter indicated, management has done a fine job of replacing the lost business from its separation from Costco (COST). It has aggressively implemented marketing endeavors and technology improvements, which should continue to bear fruit. Just as important, the benefits from tax reform will persist. Over the past several years, Amex's tax rate has hovered in the low-to-mid 30s and, for the second quarter, it was just 22%. All told, for 2018, we are reiterating our share-net estimate of $7.30, which is at the high end of management's guidance ($6.90-$7.30). For 2019, we expect earnings to reach $8.00 a share.
As for the stock, after trading lower in 2015 and early 2016, it has staged a huge comeback. In fact, it has easily outperformed the broader market over the past year-plus, and recently hit an all-time high of more than $103 a share. The surge has, in our opinion, reduced the equity's investment appeal, though AXP still offers decent, risk-adjusted return potential out to 2021-2023.
About The Company: Established in 1850, American Express Company has grown to become a leading global payments, network, and travel firm. It operates through multiple business segments, including the Global Consumer Group and Global Business-to-Business Group. The company sold its AMEX Life business in October of 1995 and its American Express Bank in February of 2008. In mid-1994, it spun off Lehman Brothers to shareholders and ten years later, did the same with American Express Financial Advisors.
- Ian Gendler
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
