American Express Q1 Earnings Is Better Than You Think

  • American Express beat estimates both on the top and bottom lines.
  • American Express’ global loan business expanded in Q1.
  • American Express lowered long-term debt relative to Q1 FY 2015.

On April 20, global credit card service company American Express (NYSE:AXP) came out with its Q1 FY 2016 earnings. The company beat average analyst estimates on both the top and bottom lines. American Express’ revenue came in at $8.09 billion, representing a 2% YoY increase. Up that to a 4% YoY increase when factoring out the negative effects of foreign currency translations (FX). However, the company’s earnings per share (EPS) (before a restructuring charge) came in at $1.45, representing a 2% YoY decrease. Things are going well for the company at least for now. Let’s take a look.

The present is ok

Investors may take comfort in the fact that American Express performed ok in the most recent quarter. “Worldwide Adjusted Billed Business” expanded 6% YoY when factoring out FX. Its total loans worldwide expanded 11% YoY, according to its slide presentation. However, its drive to acquire new merchants and increase consumer engagement via rewards and cash back pushed total expense upwards by 5% YoY. This represents something that the company definitely needs to do in the face of competition.

American Express saw an improved balance sheet versus the same time last year. In the most recent quarter, American Express held $25 billion in cash and equivalents, representing a 4% YoY increase and 119% of stockholder’s equity. The company’s long-term debt decreased 15% YoY to $47 billion, versus $55 billion at the same time last year, representing 224% of stockholder’s equity which is still high.

The future

While American Express’ present resides in the adequate range, investors rightfully worry about its future. The company largely operates in the business of lending and facilitating money. Money at its most basic level is a commodity. In a commoditized business, pricing, rebates and efficiency take precedence. In the past, American Express enjoyed prestige in a credit and transaction world dominated by plastic. However, many new competitors have entered the marketplace and current competitors are stepping up the gas.

American Express still has many things going for it. American Express still enjoys a respectable brand identity that set it apart from competitors. The company resides in the No. 25 spot on Interbrand’s 2015 global brand ranking. However, American Express lost 3% of its brand value versus 2014. Company management certainly understands the power of marketing and branding. In the earnings call, American Express Chief Financial Officer and Executive Vice President had this to say, “….the real battle for the hearts and minds of our customers is still in its early stages, I would say.” The underlying implication here is that American Express understands that when the going gets tough, American Express has to get tougher.

More importantly, American Express enjoys scale, which can serve as a great enabler in the ruthless game of capitalism. Walmart (NYSE:WMT) demonstrated this, time and again. In FY 2015, American Express’ revenue came in at $32.8 billion versus $9.2 billion for Paypal Holdings (NASDAQ:PYPL). American Express holds the upper hand in history, identity and resources. In the case of Apple (NASDAQ:AAPL) Pay, American Express can utilize its history and identity advantages. In the case of PayPal, American Express can utilize its resources to invest in competitive technologies.

Concluding thoughts

Investors should understand that American Express faces tough competitive challenges over the long-term. Its brand may not carry as much weight as in the past and it runs the risk of behaving like a run of the mill bank in the stock market. Investors should expect at least some growth, especially on the international front. Moreover, the company’s low valuation sort of offsets its low visibility on the fundamentals front. Currently, the stock trades at a P/E ratio of 13 versus 24 for the S&P 500. Finally, income-oriented investors may want to consider the stock for its annual dividend yield of 1.8% while waiting for potential capital gains to materialize.

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  • I do not have any business relationship with the companies mentioned in this post.
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