Electronic payment processor in the US, American Express Co. (AXP) (AmEx) is scheduled to release its fourth-quarter 2011 results after the market closes on January 19, 2012. The Zacks Consensus Estimate for the fourth quarter is 98 cents per share, representing about 4% growth over the year-ago quarter.
Following the trends of the first three quarters of 2011, AmEx improved credit quality with an increased usage of cards, lesser defaults, higher spending and growth in loan portfolio, which have not only reduced provision for losses but are expected to drive earnings and return on average equity (ROE). Moreover, the company’s efforts to expand in the prepaid and eCommerce spheres will further accentuate long-term growth. However, higher operating expenses and lower interest income may continue to limit the desired upside.
Previous Quarter Performance
AmEx, reported third-quarter 2011 operating earnings of $1.03 per share, comfortably ahead of the Zacks Consensus Estimate of 96 cents and 90 cents recorded in the year-ago quarter.
Meanwhile, net income from operations increased 13% year over year to $1.24 billion from $1.09 billion in the year-ago period. However, no extraordinary items were recorded during both the comparable periods.
AmEx’ card members' spending increased 16% over the prior-year quarter. The uptick came from international cards in force that rose about 11.5% year over year to $45.6 million while cards in use grew 4.3% year over year in the US.
AmEx posted total revenue, net of interest expenses, of $7.57 billion, up 9% year over year from $6.97 billion while marginally exceeding the Zacks Consensus Estimate of $7.58 billion. Additionally, the increase in revenues was supported by higher spending and higher travel commissions from card members coupled with improved loan portfolio. This was partially offset by sluggish growth in interest income due to lower yields.
Provisions for losses were $249 million, sinking 33% from $373 million in the prior-year quarter. The year-over-year decrease in provisions for losses was primarily driven by continued improvement in credit quality on the charge and credit card portfolios. However, lending balances and yield continue to remain sluggish.
Agreement with Analysts
Ahead of the earnings release, we see some downward movement in analyst estimates over the past 30 days. A similar trend has been noticed over the past 7 days. Hence, the estimate revision trends and the magnitude of such revisions justify a cautious sentiment on the street. This indicates the ongoing sluggish economic environment, primarily in the US and Europe, although Asia could provide some cushion.
In the last 30 days, one of the 16 analysts revised its estimate downward for the fourth quarter and full year of 2011, while no upward revisions were witnessed. This implies that the analysts do not foresee any directional pressure on the results.
Meanwhile, the neutral approach toward AmEx also gives scope for some positive surprises in 2011, particularly, as the company is gearing up its prepaid debit card business, which has now become the fastest growing form of electronic payments. The company’s ongoing Enterprise Growth Group (EGG) program has been focusing on diversifying its revenue mix in the areas of eCommerce, mobile payments and fee-based businesses in emerging markets through business-to-business initiatives.
Magnitude of Estimate Revisions
In the last 90 days, there have been modest revisions in the earnings estimate following the third quarter results. As a result, earnings per share increased by a couple of cents from the current level of 98 cents for the fourth quarter, while the same grew by a nickel to $4.04 for 2011. Furthermore, earnings per share inched up by a cent to the current estimate of $4.17 for 2012. However, this trend of earnings growth projection indicates a blurred outlook in the analysts’ opinion given the lack of clarity on the expense front and the macroeconomic volatility.
Going by past trends, we have a slightly mixed opinion on AmEx exceeding estimates, given the uncertain economic and regulatory environment hanging around AmEx and its peers. The company’s reported earnings per share exceeded its expectations in all of the last four quarters and has a positive four-quarter average surprise of 6.3%.
AmEx has been upgrading its digital payment platform through strategic alliances, which will not only expand the company’s card membership base but also help it to penetrate the unexplored market and tap the upcoming opportunities in the field of eCommerce. AmEx’s low risk and high return strategies are expected to generate over $3 billion in fees from these activities within five years.
Besides, AmEx’s major re-engineering program to increase efficiency and reduce activities that do not support its highest preference. Further, projected pre-tax re-engineering charges of $50–60 million (down from $60 80 million) in 2011 are expected to generate annual cost savings of $70 million from 2012 onwards. The company generated $300 million from employee plans in the second quarter of 2011. While the re-engineering program is expected to complete by the end of the second quarter of 2012, the company estimates to reduce its global workforce by 550 net positions in 2011.
AmEx also enjoys a strong capital position with a Tier 1 risk-based common ratio of 12.3%, at the end of the first nine months of 2011, well above the current regulatory requirement under Basel III and 11.1% at 2010-end. On a cumulative basis, since 1994, the company has distributed about 64% of capital generated through share repurchases and dividends. The company expects to repurchase the remaining $350 million of stock, under the current $2.3 billion share authorization, in the fourth quarter of 2011. Besides sustaining over 25% ROE growth, going ahead, management expects to invest 50% of its excess capital in the business while paying out the remaining to the investors as dividends and share buybacks.
However, though improved credit trends, capital flexibility and stable rating bode well for long-term growth, settlement payments from MasterCard Inc. (MA) and Visa Inc. (V) that ended in 2011 will limit the expense growth. Besides, lower yields on the portfolio overshadow the increased card spending.
Meanwhile, we expect lower borrowing on cards along with rising payment of outstanding debt to lower interest and loan fee income. We also remain cautious about the impact of increasing operating expenses, regulations, intense competition, volatile economic outlook and lawsuits. Nevertheless, a spend-centric business model, healthy capital and the targeted 50% payout ratio warrant enhanced growth in a stable market in the long run.
The quantitative Zacks Rank for Amerisafe is currently #3, with a short-term Hold rating, indicating no clear directional pressure on the shares over the near term.