American Express (AXP) reported another strong quarter of earnings as total revenues, net of interest expense and provisions for losses, increased 4% year-on-year, for the three months ending March. The pretax income increased by 8% over the prior year’s figure. Strong consumer spending trends in the U.S. and international expansion via the company’s global network and merchant service were the main reasons for the growth observed in the quarter.
The U.S. division, which accounts for more than half of AmEx’s revenues, reported a 5% increase in revenues net of interest expense while the pretax income jumped 8%. The global network and merchant service division, which has agreements with third party financial institutions to issue American Express branded cards, reported a 4% year-on-year increase in revenues and an 8% increase in pretax income.
Our $63 price estimate for the company’s stock is in line with the current market price.
Consumer Spending Remains Strong
Despite increased taxes due to the budget deal passed by the U.S. Senate in January,  consumer spending on American Express cards remained strong. The average basic cardmember spend on propriety American Express cards in the U.S., increased 5% over the prior year’s figure. Total propriety cards in force increased 3% to 42.5 million. As a result, the revenue from discount fees charged from merchants accepting American Express cards increased by 5%.
American Express is usually associated with affluent customers. The average AmEx household earns about $97,000 per year.  The annual average spend per AmEx card is around $15,000 while the figure for Visa (V) and MasterCard (MA) is around $2,000. This spend-centric strategy of targeting well-off customers helped the company steer clear of the financial crisis in 2008. We believe AmEx can maintain growth in this domain even in the current economic uncertainty. Please read our article: Analyzing American Express’ Spend Centric Model And Future Growth Potential for more details.
Third-Party Issued Cards Will Allow For Global Expansion
In the U.S., American Express operates a closed loop network issuing its own cards and acting as the acquirer, collecting discount fees directly from merchants. Outside the country, however, the company has adopted a different strategy for expansion. Almost 80% of the American Express branded cards issued outside the U.S. in 2012 were issued through third-party financial institutions, in agreement with the company’s global network services (GNS) division. This strategy allows the company to enhance its presence in countries where the institutions are already established, and expands its cardmember and merchant base at cost levels that would not have been feasible on its own.
Global network and merchant services cards in force increased by 9%, year-on-year, in the first quarter of 2013, to reach a total of 38.1 million. The card billed business also increased by 9% over the prior year’s figure. As a result, the discount revenue earned by the division increased by 4%. The global network and merchant services division accounts for 15% of American Express’ net revenue.
Transaction fees earned through third-party issuers have increased by a compound annual growth rate of 15%, higher than the CAGR of 9% for propriety cards in the U.S. We expect the company to maintain a high growth rate in this domain. Please read our article: Why American Express Is Growing Its Third Party Issued Cards Business for more on growth prospects related to third-party issued cards.
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