American Express Co. (AXP) or AmEx reported third-quarter 2014 operating earnings per share (EPS) of $1.40, which surpassed the Zacks Consensus Estimate of $1.38 by 1.4%. This marked the company’s third consecutive earnings beat. EPS also topped the year-ago quarter figure of $1.25 by 12.6%. With this result, the company’s average four-quarter beat stands at 2.4%.
Notably, net income from operations climbed 8% year over year to $1.48 billion from $1.37 billion in the year-ago period. The upside was primarily driven by a surge in consumer spending from AmEx cards and a lower share count.
AmEx’ total billed business, or global card spending, continued to witness improvement in the U.S. and overseas, increasing 9% year over year to $258.1 billion. The rise came from the cards used in the U.S. as well as internationally, both of which jumped 9% each to $173.0 billion and $85.1 billion, respectively.
Quarter in Details
AmEx posted total revenue, net of interest expenses, of $8.33 billion, almost flat from both the prior-year quarter and from the Zacks Consensus Estimate. Excluding revenues from the divested global travel operations in the year-ago quarter, total revenue rose 5%. The upside in revenues was attributable to modest growth in card fees, net interest income and the loan portfolio and decline in interest expenses. Increased yields, strong credit indicators and higher lending balances drove growth as well.
However, provisions for losses surged 16% to $488 million, primarily owing to higher net write-offs in the reported quarter and an unfavorable comparison with a large credit reserve releases in the year-ago quarter.
AmEx’s total expense declined 5% year over year to $5.6 billion in the reported quarter, primarily reflecting decreases in salaries, employee benefits, professional services, marketing and promotion along with occupancy and equipment expenses. These were, however, partially offset by higher card member rewards and services. Tax rate was 34% against 32% in the year-ago quarter.
Segment Results
U.S. Card Services reported net income of $889 million, up 14% from $782 million in the prior-year quarter. Total revenue, net of interest expenses, increased 6% to $4.5 billion.
International Card Services’ net income amounted to $142 million, at par with the year-ago quarter. However, total revenue, net of interest expenses, came in at $1.4 billion, up 3% year over year, driven by higher cardmember spending and revenues from the Loyalty Partner business. These were partly offset by lower interest income.
Global Commercial Services’ net income plummeted to $204 million from $261 million given the absence of earnings due to spin-off of business travel operations. Moreover, total revenue, net of interest expenses, tumbled 26% year over year to $900 million. However, excluding business travel revenue in the prior-year quarter, revenue rose 9%, reflecting higher spending by card members.
Global Network & Merchant Services reported net income of $427 million, up 9% from $391 million in the prior-year quarter. However, total revenue, net of interest expenses, rose 5% year over year to $1.5 billion, driven by higher merchant-related revenues.
Corporate & Other reported net loss of $185 million, narrower than net loss of $210 million incurred a year ago.
Financial Update
As of Sep 30, 2014, AmEx’s total assets were $154 billion (down from $153 billion at 2013-end), while long-term debt totaled $56 billion (up from $55 billion at 2013-end level) against cash of $21 billion (up from $19 billion at 2013-end). Meanwhile, shareholder equity amounted to $20 billion at the end of Sep 2014, up from $19 billion at 2013-end.
As of Sep 30, 2014, AmEx’ return on equity (ROE) was 28.8%, up from 24.3% in the year-ago period. Return on average common equity (ROCE) was 28.6%, increasing from 24.1% in Sep 2013. Further, return on average tangible common equity was 35.6%, up from 30.6% in the comparable period last year. Further, book value increased 9% year over year to $19.54 per share.
Capital Deployment Update
During the reported quarter, AmEx repurchased 13 million shares, at an average price of $88.49, for a total of about $1.15 billion.
On Aug 8, 2014, the company paid a quarterly dividend of 26 cents a share to shareholders of record as on Jul 11. This payout marks an increasefrom 23 cents in May 2014, marking the third dividend hike by the company since Nov 2007.
Approximately 89% of the capital generated was distributed to shareholders through dividend payouts and share repurchases in third-quarter 2014.
Additionally, AmEx aims to buy back shares worth about $2.3 billion in the second half of 2014 (totaling $4.4 billion in 2014), while another $1.0 billion of repurchases are projected in first-quarter 2015.
Guidance
In Jan 2014, management disclosed its aim of keeping operating expense rise under 3% in 2014.
Zacks Rank
American Express currently carries a Zacks Rank #3 (Hold).
Peer Take
Among AmEx’s peers, Discover Financial Services (DFS) and MasterCard Inc. (MA) are slated to release third-quarter 2014 earnings results after the closing bell on Oct 20 and before the opening bell on Oct 30, respectively.
Meanwhile, Visa Inc. (V) is scheduled to post fourth-quarter fiscal 2014 earnings after the closing bell on Oct 29.
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