On Sep 23, we issued an updated research report on American Express Co. (AXP) or AmEx. The company is likely to benefit from the strategic streamlining of its businesses, while keeping its expenses under control. However, heightened competition, currency fluctuations as well as litigation damages raise financial and operating risks.
This Zacks Rank #3 (Hold) stock generated positive earnings surprises in three of the trailing four quarters with an average beat of 2.6%. The company’s second-quarter 2014 earnings of $1.43 a share also outshone the Zacks Consensus Estimate by 3.6% and exceeded the year-ago quarter figure by 12.6%.
The upside was primarily driven by a surge in consumer spending from AmEx cards and a lower share count. The company also recorded post-tax net gains of 5 cents per share in the reported quarter from spin-off of its business travel operations. However, the gains were partially offset by transaction-related costs, restructuring charges and contribution to American Express Foundation.
AmEx’s spend-centric business model and healthy capital ensure strong growth over time. Additionally, the company generated return on equity (ROE) of 28.8% at the end of Jun 2014 against 27.8% in 2013 and 23.1% in 2012, outperforming its target of achieving over 25% of long-term ROE. Management intends to limit the rise in operating expenses to less than 3% in 2014 and was well within this target in the first half with only a 1% increase.
AmEx’s low risk and high return strategies also helped to generate earnings growth of 25% in 2013 and 14% in first-half 2014, well within management’s target of 12–15% earnings accretion, boosting optimism for the upcoming years as well.
AmEx also maintains healthy capital ratios and ROE, in order to consistently invest 50% of its excess capital in the business, while paying out the remaining to investors through dividends and share buybacks. The company aims to repurchase shares worth $2.3 billion in second-half 2014 and $1.0 billion in first-quarter 2015.
Conversely, the possibility of rise in expenses, given the impact of regulations and lawsuits, raise concerns. The outcome of ongoing lawsuit with the Department of Justice (DoJ) and 17 states in the US is expected to be imminent. We believe that the process of litigation and a probable adverse verdict could weigh on the company’s financials in the future.
Furthermore, the provision for losses has witnessed a rising trend over the past few years, given a modest deterioration in credit metrics, portfolio growth and lower lending reserves, indicating the need to increase loan loss reserves. Adverse changes in the asset-liability mix and higher charges incurred from acquisitions, divestments, lawsuit settlements and restructuring have also weakened AmEx’s operating cash flow, which plunged 52.2% year over year to $4.89 billion in first-half 2014.
Overall, a balanced risk-reward profile for the near term has led to minor upward estimate revisions for 2014 and 2015. The Zacks Consensus Estimate for 2014 and 2015 is now pegged at $5.52 and $6.05 per share, up 5 cents and 2 cents a share, respectively, in the last 60 days.
Key Picks in the Sector
Investors interested in the financial sector could consider better-ranked stocks like Vantiv Inc. (VNTV), Markit Ltd. (MRKT) and Green Dot Corp. (GDOT). All of these stocks sport a Zacks Rank #1 (Strong Buy).
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