American Express Beats Q4 Expectations
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
The world’s largest card issuer by purchase volume, American Express (NYSE: AXP), reported better than expected earnings, but was a little light on revenue.
Fourth quarter earnings rang in at $1.01 per share versus an expected $0.98 per share. Total revenue increased to $7.74 billion, up from $7.32 billion in the previous year, but fell short of the $7.92 billion expected by analysts.
CEO Kenneth Chenault was positive on the company’s results, commenting in the post-earnings conference: “Card members spent a record amount on their American Express cards. Billed business rose 11 percent, showing broad-based improvements from the strong levels of a year ago.”
Other highlights from the earnings report include an increase in average expenditures by cardholders and an increase in return on average equity. ROE moved to 27.7% from 27.5%, the previous year’s quarter. The company’s Global Commercial Services reported a net income of $180 million, a 75% gain from the year-ago quarter. Its Global Network & Merchant Services also performed well, reporting a 25% increase in fourth quarter net income.
The company’s spending is a bit of concern because it has been investing heavily in marketing, product development, and rewards programs in an effort to gain market share and defend against alternative payment solutions. The company reported expenses of $5.6 billion for the quarter, a decline from the previous quarter but an increase year-over-year.
I view the spending as a necessary evil, especially because several tech darlings are developing their own payment solutions. Google’s (NASDAQ: GOOG) near-field-communication based system is likely the biggest long-term threat given the ubiquity of their Android phones, but eBay’s (NASDAQ: EBAY) PayPal is increasingly potent. EBay just announced that it would be rolling out its in-store payment system in more than 2000 Home Depot stores by March.
American Express differs from its rivals MasterCard and Visa because it actually issues cards in addition to processing transactions. AmEx compensates for this additional risk by targeting higher-worth individuals and providing services for businesses. This has shielded AmEx from some of the downturn, though the stock still hasn't regained its pre-2008 highs.
The company has a very strong brand and trades at a discount relative to its rivals based on current PE. They also have consistently held the lowest delinquency rates and have the largest dividend yield at 1.90%. Assuming the company can control its costs and continue expanding internationally, it should outperform the market. I consider American Express best in class and am bullish long-term. As consumer sentiment rises, so should the stock.
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