AmEx Beats on Stable Card Spending

Zacks

American Express Co. (AXP), also known as AmEx, reported its first-quarter 2013 operating earnings per share of $1.15. The result comfortably surpassed the Zacks Consensus Estimate of $1.11 and the year-ago quarter earnings of $1.07 a share.

Consequently, net income from operations edged up 2% year over year to $1.28 billion from $1.26 billion in the year-ago period.

AmEx’s total billed business, or global card spending, continued to witness improvement in the U.S. and beyond climbing 6% year over year to $224.5 billion. The increase came from international cards-in-force that escalated 4% year over year to $74.5 million, while cards-in-use improved 7% in the U.S.

Behind the Headlines

AmEx posted total revenue, net of interest expenses, of $7.88 billion, up 4% year over year from $7.59 billion but lagged the the Zacks Consensus Estimate of $7.99 billion. The year-over-year upside in revenues was supported by moderate growth in card spending, net interest income and the loan portfolio. Further, delinquency rates and yield exhibited stability, partially offset by lower lending balances.

However, provisions for losses were $497 million, spiking 21% from $412 million in the prior-year quarter. The increase was driven primarily by lower reserve release, partially offset by lower net write-offs in the reported quarter.

Meanwhile, AmEx’s total expenses inched up 1% year over year to $5.48 billion in the reported quarter. This reflected 4% rise in card member rewards and professional services along with higher occupancy and equipment expenses. These were partially offset by lower salaries and benefits expenses along with market and promotion expenses and stability in other operating expenses. However, tax rate jumped to 33% from 29% in the year-ago quarter.

Segment Results

U.S. Card Services reported a net income of $807 million, up 7% from $752 million in the prior-year quarter. Total revenue, net of interest expenses, increased 5% to $4.1 billion from $3.9 billion in the year-ago quarter.

International Card Servicesnet income came in at $178 million, declining 10% from $197 million in the year-ago quarter. However, total revenue, net of interest expenses, came in at $1.3 billion, up 1% from the year-ago quarter, driven by higher cardmember spending and annual cardmember fees.

Global Commercial Servicesnet income improved 8% to $191 million from $177 million in the prior-year quarter. Total revenue, net of interest expense, inched up 1% year over year to $1.2 billion, reflecting higher spending by corporate card members, while business travel commissions and fees declined.

Global Network & Merchant Services reported net income of $373 million, up 4% from $357 million in the prior-year quarter. Total revenue, net of interest expense, increased 4% year over year to $1.3 billion, driven by higher merchant-related revenues.

Corporate & Other reported net loss of $266 million compared with a net loss of $227 million a year ago.

Financial Update

As of Mar 31, 2013, AmEx’s total assets stood at $157 billion (higher than $153 billion at 2012-end), while long-term debt totalled $56 billion (down from $59 billion at 2012-end) against cash of $28 billion (up from $22 billion at 2011-end). Meanwhile, shareholder’s equity totalled $19 billion at the end of the reported quarter, unchanged from 2012-end.

As of Mar 31, 2013, AmEx’s ROE was 23.2%, down from 27.1% in the year-ago period. Return on average common equity (:ROCE) was 23.0%, declining from 26.8% in the prior-year quarter. Further, return on average tangible common equity was 29.3%, also down from 35.0% in the comparable period last year. However, book value increased 3% year over year to $17.56 per share.

Capital Deployment Update

During the reported quarter, AmEx repurchased 13 million shares, at an average price of $61.73, for a total of $802.5 million.

On Mar 14, 2013, management had disclosed its plans to buy back shares worth $3.2 billion in 2013, followed by another $1.0 billion of share repurchase in the first quarter of 2014. Meanwhile, the company also intends to hike its regular quarterly dividend by 15% to 23 cents in the second quarter of 2013.

On Mar 25, 2013, the board of AmEx also authorized a share repurchase program worth 150 million shares, thereby replacing the prior one.

Dividend Update

On Mar 25, 2013, the board of AmEx declared a regular quarterly dividend of 20 cents per share, which is payable on May 10, 2013 to shareholders of record as on Apr 5, 2013.

On Feb 8, 2013, AmEx paid a regular quarterly dividend of 20 cents per share to shareholders of record as on Jan 4, 2013.

In Mar 2012, this dividend was hiked by 11% from 18 cents, which was sustained even during the recession period.

Peer Take

AmEx’s peers, MasterCard Inc. (MA) and Visa Inc. (V) are scheduled to release their first quarter results before the market opens and after the closing bell on May 1, 2013, respectively. While AmEx carries a Zacks Rank #2 (Buy), Visa carries a Zacks #3 Rank (Hold) and MasterCard holds a Zacks Rank #4 (Sell).

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