On Mar 19, we issued an updated research report on American Express Co. AXP or AmEx. The company’s healthy capital ratios and expense management pave the way for incremental shareholder return. However, heightened competition, litigation outcomes, loss of major business and low interest rates continue to cast a bleak outlook.
The possibility of below-average long-term growth in 2015 due to rise in expenses, loan loss provisions, foreign currency fluctuations and pressured discount rate in Europe raise concerns. Absence of the Costco client in Canada effective from Apr 2016 may further hamper billings and earnings, as it currently accounts for 8% or $80 billion worth of the company’s billed business and about 20% or $14 billion of its interest-bearing credit portfolio.
Low interest rates are equally hurting returns from investment securities, loan fee income and bank deposits, restricting top-line growth. The company also plans to resort to higher interest rates on about a million of its credit cardholders, particularly in the U.S. for the first time in over five years.
Going forward, the company also has to exercise strict expense control in 2015 in order to maintain its margins and cash flows. While the Department of Justice (DoJ) and 17 states in the U.S. have reaffirmed their allegation in Feb 2015, we believe that the process of litigation and a probable adverse monetary outcome, which is imminent, could weigh on the company’s financials in the future.
On the other hand, the launch of the revolutionary prepaid debit card and Target prepaid along with reduction in some merchant fees are other initiatives to build a new revenue-generating platform targeting customers apart from the affluent class reflects AmEx’s focus on growth through diversification. The first cross-branded credit cards (Plenti) in the U.S., scheduled launch in May 2015, is further expected to help American Express partly recover from the loss of the major Costco account.
Armed with excess cash and investment securities of $15.2 billion at 2014-end, along with a strong operating cash flow of $11 billion in 2014, (up from $8.55 billion in 2013 and $7.1 billion 2012), the company remains sufficiently liquid to finance $13.4 billion in funding maturities through Dec 2015. Strong liquidity has also facilitated expanded share buyback targets, while an 11.5% hike awaits approval from the board.
Earnings Review
This Zacks Rank #4 (Sell) stock generated positive earnings surprises in all the trailing four quarters with an average beat of 2.8%. The company’s fourth-quarter 2014 earnings of $1.39 a share also exceeded the Zacks Consensus Estimate by 0.7% and exceeded the year-ago quarter figure by 11.2%.
Overall, an unfavorable risk-reward profile for the near term has led to downward estimate revisions for 2015 and 2016. The Zacks Consensus Estimate for 2015 and 2016 is now pegged at $5.54 and $5.87 per share, down 8.3% and 11.9%, respectively, in the last 60 days.
Key Sector Picks
Some better-ranked stocks in the financial sector worth considering are Blackhawk Network Holdings Inc. HAWK, General Finance Corp. GFN and Synchrony Financial SYF. All these stocks carry a Zacks Rank #2 (Buy).
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