American Express Preannounced Strong Results Amid Job Cuts
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American Express reported stronger than expected results for the fourth quarter on higher Cardmember volumes and revenues despite an uneven economy. “We’ve delivered strong results since coming out of the recession and have been consistently gaining share in a very competitive U.S. industry,” said Kenneth I. Chenault, Chairman and Chief Executive Officer. The company took three charges including restructuring charges, cardmember reimbursements, and membership rewards liability. I believe the stock presents an opportunity for investment. Also, I believe Visa and MasterCard will also benefit from improved cardmember activity.
Company Overview
American Express (NYSE: AXP) operates as one of the major global payments industry player providing innovative payment solutions, travel services and expense management to customers and regions spread in over 130 countries. Charge cards, credit cards, travel related products, network services, and other prepaid products form some of the major products and services being offered by the company. Previously, around 70% of the revenues for American Express accrued from card transaction related fees, while only 6% accrued from travel services.
4Q Earnings Pre-announcement
AXP’s reported bottom line exceeded its estimates by 3%, while the top line remained in line with the consensus mean estimate. The company reported adjusted net income of $1.2 billion or $1.09 per share on expectations of $1.06 per share. This is compared to $1.2 billion, or $1.01 per share, for the same quarter of 2011. The company met analysts’ revenues expectations of $8.1 billion for the fourth quarter of the prior year.
Despite a brief dip in Cardmember spending due to Hurricane Sandy, the company reported cardmember spending 8% higher than a year ago. The write-off rate for AXP’s lending portfolio was 2% reflecting the fact that credit indicators remained at historical low levels during the fourth quarter.
During the last quarter of the prior year, the company reported collection of late fees of $28 million from cardmembers who did not receive statements for the billing period prior to write-off of their accounts, while around $24 million was charged in interest to cardmembers who had disputed balances on their accounts. Around $68 million in bonus rewards for industry spending were also credited to cardmembers during the last quarter of the prior year.
The company also announced a $400 million restructuring charge designed to contain future operating expenses. As part of the restructuring, the bank expects to eliminate 5400 jobs, partially offsetting the jobs that the company expects to add during the year. The largest reduction of jobs is expected to come in the travel business, while its costs will also be contained. Reengineering the business model in Global Business Travel, continuing the reconfiguration of cardmemeber servicing, ensuring that the company has the right organizational structure and elimination of functions with redundant tasks are among other objectives of the restructuring that the company intends to carry out.
Valuations
American Express trades at 14 times to its last year’s earnings, while Visa (NYSE: V) and MasterCard (NYSE: MA) trade at 86 times and 30.5 times their earnings. This makes American Express an attractive investment as it is currently cheaply priced compared to its peers in the global payment industry. AXP’s stock presents an upside of 4% as analysts have a consensus mean price target of $63.27 for it while it is currently exchanging hands at $60.79 per share.
Conclusion
I believe American Express is all set to release strong results on better than expected cardmember volumes and higher revenues. I believe Visa and MasterCard, the other two payment industry giants, will benefit from improved cardmember volumes.
equityfinancials has no position in any stocks mentioned. The Motley Fool recommends American Express Company and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
