American Express: A Bet On Trump

| About: American Express (AXP)
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Summary

What a move over the last three months for AXP.

It comes down to performance when expectations rise.

I discuss the just reported Q4 and its implications.

American Express (NYSE:AXP) has been extremely strong since mid-October, almost rising straight up with few pullbacks in this three month stretch. The run has been impressive but was in large part predicated on expectations for improvement in performance. The move is really a bet on Trump. A bet that the new administration will deliver growth. While it is true that the consumer is the strongest they have been in many years, much remains to be done to really get the economy churning along again. That said, the financial sector has been bid up in hopes that a business friendly Trump administration will benefit the sector and the consumer as a whole. But has performance been improving on its own without a changing of the guard?

To answer this important question, I will examine in this article the company's just reported Q4 earnings and key metrics. Let me start off by saying that the company beat analyst estimates on the top line but missed handily on the bottom line. The revenues beat estimates by $70 million, coming in at $8.02 billion but was actually down 4.4% from the revenues taken in last year. Currency exchange adjusted revenue growth, factoring in interest expenses, was actually up 6%. That last part is really key. We still have to be mindful that this company is extremely vulnerable to currency valuation variability in addition to the fact that Costco (NASDAQ:COST) business now has been lost. So we see that adjusted revenues increased 6%. It is important to note that these increases came directly from credit card spending and associated interest and fees, as well as a strong net interest income. Card member spending was up year-over-year as well. It is also worth mentioning that revenues were up sequentially from the $7.77 billion seen last year.

Now what about the company's expenses? As you know these can make or break financial services companies. The good news is that the company's consolidated expenses totaled $6.2 billion, down2% from the $6.4 billion in expenses in the year ago quarter, but up substantially from Q3. Although expenses decreased as a whole compared to last year, we should investigate deeper. Once again it is important to remember that last year's results included Costco-related rewards costs. It is also key to note that the company benefited from a much lower effective tax rate of 29% versus 38% last year.

What about the earnings figures themselves? Well, net income came in at $825 million, down 8% from the $899 million in last year's comparable quarter. Factoring in these expenses and revenues, diluted earnings per share fell 1% to $0.88, down from $0.89 a year ago. Factoring in adjustments, earnings per share was $0.91. This was a rather strong miss of $0.07 versus estimates.

American Express is still resetting itself. The company has taken steps to move in the right direction to ensure its long-term viability. I want to add in the quarter that the underlying loan portfolio and credit metrics remained excellent. For the full year, the company reported net income of $5.4 billion, up 5% from $5.2 billion a year ago. Diluted earnings per share was $5.65, compared to $5.05 a year ago. Excluding restructuring charges related to cost reduction efforts, adjusted diluted earnings per share was $5.93. It is also a strong result that these earnings were within the company's 2016 guidance range. Looking ahead, the outlook for 2017 is for earnings of $5.60 to $5.80. With the recent run up in shares it may be time to take some profits but I remain cautiously bullish.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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.