On Nov 24, we issued an updated research report on American Express Co. (AXP) or AmEx. Modest growth in card spending, disciplined expense management and incremental shareholder return are driving this Zacks Rank #3 (Hold) stock. However, heightened competition, outcome of the regulations and litigations as well as low interest rates are hindering the desired upside.
AmEx generated positive earnings surprises in three of the trailing four quarters with an average beat of 2.4%. The company’s third-quarter 2014 earnings of $1.40 a share also exceeded the Zacks Consensus Estimate by 1.5% and exceeded the year-ago quarter figure by 12%.
AmEx’s efforts to make a mark in the mobile payments space is amplifying the scope of growth from its OptBlue program, Amex EveryDay Credit Card and the ongoing merchant acquiring alliances (the latest being Uber, Apple Pay and McDonald’s).Less reliance on revolving credit and back-end fees also help the company gain competitive advantage and improve its overall risk profile.
Moreover, increased market penetration, merchant acceptance and brand recognition is aiding expansion of AmEx’s list of network partners. On the other hand, capital position remains strong and flexible with a Tier 1 risk-based common ratio of 13.6% and operating cash flow of $8.57 billion at Sep 2014-end. The company remains sufficiently liquid to finance $13.7 billion in funding maturities through Sep 2015, also evident from the distribution of about 89% of its capital generated via share repurchases and dividends.
Meanwhile, a 1% decline in total expenses in the first nine months of 2014 also strengthens operating leverage. Going forward, AmEx is also expecting significant gains from the divestment of its 13.5% stake in Concur Technologies, which shall be acquired by SAP by early 2015.
However, risks arise from higher provision for losses (up 8% year over year in the first nine months of 2014),adverse changes in asset-liability mix, changes in market demand, lawsuit settlement, regulatory compliance and restructuring charges. Alongside, expanded global market coverage, wherein arch-rivals like MasterCard Inc. (MA), Visa Inc. (V) and Discover Financial Services (DFS) already hold defiant competitive positions raise caution.
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 $5.55 and $6.06 per share, up 3 cents and 1 cent a share, respectively, in the last 60 days.
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