American Express Company (AXP), with the market cap of $71.41B, is the most profitable closed-loop credit card network in the U.S., providing credit and travel services to affluent customers. Although AXP missed the revenue estimates for Q1, AXP continues to improve its bottom line.
Q1, 2013 Earnings
For Q1, 2013, revenue increased nearly 4 percent to $7.88B from $7.61B a year ago, which missed the estimates of $8.03B. However, net income increased 2 percent to $1.28B or $1.15 per share, beating analysts' estimates of $1.12 per share. EPS grew faster than net income due to share buybacks, which had reduced the outstanding shares by 5% year-over-year.
Despite one less day compared with Q1, 2012 (Leap Year), billed business came in at $224B, which grew 6% on a reported basis and 7% on an FX adjusted basis. Cards in force grew at 5% while proprietary cards grew at 2%. All segments performed consistently with Q4, 2012, except for Global Corporate Services, which had slower growth due to a slower T&E spending growth.
Increasing Provision for Losses
The total provision for losses increased 21%, whereas charge card provision increased 10%, primarily driven by higher receivables, which are 5% higher than a year ago. Card member loan provision increased 30% or $63M, reflecting a 4% increase in card member loans compared to last year. The net write-off rate remains stable and remains historically low.
Increasing Capital Ratios
For Q1, 2013, Tier 1, Tier 1 common and total capital ratios increased due to an increase in capital, primarily driven by capital generation of $1.5B. AXP has a strong capital position with the Tier 1 common capital ratio at 12.6%.
Increasing Dividend and Strong Buyback
The management plans to increase the dividend to $0.23 per share from $0.20 per share next quarter, a 15% increase for shareholders. The management also plans to repurchase common shares that will total up to $3.2B during the remainder of this year (up to $4 billion in 2013) and up to an additional $1B in Q1, 2014.
Analysts' Call and Estimates
Analysts currently have a mean target price of $66.96 for AXP, suggesting 2.95% upside potential based on the closing price of $65.04 on April 18, 2013. Analysts, on average, are estimating an EPS of $4.76 with revenue of $33.33B for 2013, which is 5.50% higher than 2012. For 2014, analyst are predicting an EPS of $5.29 with revenue of $35.35B, which is 6.00% higher than 2013.
Fundamentally, AXP's key stats will be compared to its peers in the industry of credit services, including Visa, Inc. (V), MasterCard Inc. (MA), Capital One Financial Corp (COF), and Discover Financial Services (DFS), to see where it stands.
Revenue Growth (3 Year Average)
Operating Margin, %, ttm
Net Margin, %, ttm
P/E 5 Year Average
14.3 (S&P 500's average)
Visa and MasterCard remain as growth story and enjoy higher P/E while AXP continues to achieve higher growth and generate a stronger ROE as compared to the industry average. From the valuation perspective, AXP's current P/E of 16.5 is higher than its 5 year average of 14.6, but AXP's Forward P/E of 12.3 is below S&P 500's average of 14.3. COF also had evolved to a diversified financial holding company, which offers a good mix of growth and income.
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend. The momentum indicator, RSI (14), is picking up and approaching neutral line. AXP is currently trading slightly above its 50-day MA of $64.21 and above its 200-day MA of $58.88. The next resistance is $69.25, the R1 pivot point, followed by $71.24, the R2 pivot point, as seen from the chart below.
How to Invest
AXP continues to deliver solid profit with the efficient management. AXP, with its strong network and association with affluent customers, should continue to generate excess economic profit. AXP's share price will be supported with increasing dividend and strong share buyback. However, in the near term, it is important to see if AXP can hold above its 50-day MA to determine its short-term direction. Investors can also review the following ETFs to gain exposures to AXP:
- Dow Jones U.S. Financial Services Index Fund (IYG), 3.69% weighting
- Financial Select Sector SPDR (XLF), 2.74% weighting
- Dow Jones U.S. Financial Sector Index Fund (IYF), 2.07% weighting
Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.