The earnings season is kicking into full gear, and yet again, the global payment, network and travel company American Express (NYSE: AXP) has stormed Wall Street by reporting better-than-expected financial results. In its third-quarter results, the company posted revenues and net income of $8.4bn and $1.4bn, representing 9% and 19% year-over-year growth respectively, mainly driven by increase in net interest income, higher credit card spending at lower tax rate and the effect of share buyback. Net interest income grew at a staggering 26% year-over-year to $1.7bn as the company’s loan book accounted for larger portion of high-interest AmEx branded cards loans than cobranded card loans. In addition, the lower tax rate of roughly 26% resulting from the realization of certain foreign tax credits contributed to the bottom line.
American Express has also raised its full-year earnings guidance between $5.80 and $5.90 to account for strong loan growth and credit metrics coupled with lower operating expenses. Year-to-date, the company has delivered an average market return to the tune of 22.6% to its shareholders (see the below chart), outperforming industry peers Capital One Financial (NYSE: COF), Discover Financial Services (NYSE: DFS), Synchrony Financial (NYSE: SYF), Citigroup Inc. (NYSE: C) and JPMorgan Chase & Co. (NYSE: JPM). The company’s stock currently trades above the 52-week high at $92.75 with a market capitalization of $81.49bn and still has a 12-month price target of $106. If this price target is attained, American Express will be worth $11.64bn more.
Now, let’s dig a little deeper see out how American Express is gearing up to improve its top and bottom lines and why investors should care for it.
American Express is aggressively focusing on addressing the financial needs of businesses as well as expanding into lucrative international markets to drive business volumes. The company has a strong presence in the US and derives most of its revenues from the country. Nearly three-quarters (74%) of small businesses are optimistic about the economy and more than half (57%) have plans to make capital investments. In the recent quarter, Amex’s US SME billings (small and midsized enterprises with than $300m in annual revenues) grew at 10%. To support further growth in the US commercial segment, AmEx has introduced American Express Business Loans to provide small businesses quick access to unsecured loans up to $50,000 at competitive interest rates, either to grow their business or to consolidate their debt. On the other hand, American Express continued to experience strong growth in international commercial segment as SME billing grew by 15% in Q3’17.
The company is also gaining from investments made in growth opportunities over the last couple of years. Strategic initiatives focused on the Platinum card portfolio and OptBlue program as well as the secular shift towards electronic payments appear to be paying off. In Q3’17, US consumer billings rose by 7%, while international consumer billings climbed 13% benefitting primarily from proprietary cards with a closed loop model. Japan, Mexico, India China and the UK are driving solid business volumes, with China expected to become a bigger card payments market than the US in another 10 years. Last year, Chinese Government gave foreign payment card companies access to its $8.4trn card payments market.
Furthermore, American Express continues to augment consumer credit card portfolio to strengthen its market position in the US. Last month, American Express collaborated with the US-based global airline carrier Delta Air Lines (NYSE: DAL) to launch the first no annual fee Blue Delta SkyMiles credit card. The card competes against products offered by firms such as JPMorgan Chase, which recently introduced Sapphire Reserve credit card to attract customers with travel credits and other treats. In addition, American Express increased its bonus points reward for new Platinum card customers from 40,000 bonus points to 60,000 bonus points to compete with Sapphire Reserve card.
Despite drops in revenue, partly by losing its lucrative co-branding deal with Costco Wholesale Corp. (NASDAQ: COST) to Visa Inc. (NYSE: V), American Express continued to make strong progress on cost reductions. Due to efficiencies in marketing spend, the company expects operating expenses to be lower than $10.9bn in 2017 as against $11.6bn in 2014. To be exact, American Express has ambitious plans to remove $1bn from its overall cost base by the end of 2017.
The Bottom Line
American Express trades at a substantial discount to its industrial peer group with an average P/E multiple of 18.8x. Additionally, price-to-book value of 3.8x relative to the industry average suggests the stock is undervalued. Given its solid progress on the fundamentals, the stock is slated to perform relatively well in the upcoming quarters.
Also, American Express has recently started a tradition of returning a portion of its profits to shareholders, either through dividends or share buybacks. Last month, the company announced a 9% increase in its quarterly dividend payout to $0.35 per share. The company also plans to pursue a $4.4bn share buyback programme through the second quarter of 2018. With trailing-12-month free cash flow sitting at $8.0bn, investors can continue to expect stable quarterly dividend payouts as well as regular share repurchases.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.