5 Reasons Not to Worry About American Express’ Earnings

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The fourth-quarter earnings release from American Express (NYSE: AXP  ) was pretty lackluster. But underneath the numbers was a story of a company producing solid earnings and making plans for the future. Here are the top five reasons you should be more excited about the American Express earnings.

1. Credit quality
AmEx has been reporting improved credit quality for some time. In the company's newest earning release, the trend continues with past-due accounts (30 days) in its lending segment continuing a downward trend to 1.2% of the portfolio. American Express also has had a very stable level of write-offs for lending accounts, hovering right around 2%.  Rival Capital One (NYSE: COF  ) reported a net charge-off rate of 2.26% for the fourth quarter. Both companies reported a declining trend in charge-off rates when compared to 2011. Though Capital One's current rate is higher, it had a larger decline year over year, dropping 43 basis points, while AmEx's rate dropped only 30 bps. American Express is enjoying credit indicators at historical lows and boasted about having the best credit performance in the industry.

2. Liquidity
It's always nice to see that a company is planning for a rainy day. So investors should feel comforted that AmEx has $16.1 billion in "excess" cash as of year-end 2012. Now, the company was below its liquidity goal, which is a match of available cash to total funding maturities within the next 12 months. For 2013, that number turns out to be $16.6 billion, so the company's not too far off. And according to CEO Kenneth Chenault on the earnings call Thursday evening, the $500 million gap was eliminated within the first week of January.

3. Growth
Growth can be measured in several ways for American Express:

  • Card-member spending was up 8% in the fourth quarter, despite a brief interruption from Hurricane Sandy. 
  • Increases in billed business were the primary driver for increased loans -- not balance transfer offers. 
  • All segments of revenue had increases from 2011, with the exception of Travel. 

2012 was a decent year for American Express' growth. And with future plans to expand, there's plenty more where that came from.

4. Opportunities
Chenault made it clear on the earnings call with analysts that the company has been heavily investing in its future and will continue to do so. With its new Bluebird card, part of a partnership with Wal-Mart, AmEx hopes to expand its presence in the prepaid market. The company has also been increasing its marketing in international segments, as it drives to expand its business outside of the US . So far, Australia, Hong Kong, Germany, and the U.K. seem to be the biggest drivers in international growth. With planned cuts to its travel segment and an increased mobile presence, the company has plenty of room for expansion.

5. Performance
So, this is the part that really might have thrown investors for a loop. A 47% drop in net income is nothing to sneeze at. And neither is 45% decrease in EPS . But before you run away screaming, consider two things: (1) the impact of the company's new initiatives will most likely not be recurring expenses in future quarters, and (2) it made a preemptive strike -- in the form of an announcement from last week. To that second point, the company laid out three charges that would be hitting the quarter's bottom line. So if we take a look at several metrics that show a bigger picture in comparison to some of AmEx's competitors, the numbers don't look so bad.


Revenue Growth 2011-2012

Net Margin FY 2012

Return on Equity
FY 2012

American Express




Citigroup (NYSE: C  )




Capital One




Visa (NYSE: V  )




Source: Company fourth-quarter earnings releases and supplements; Visa's fiscal year 2012 ended Sept. 30, 2012.

Even without adjusting AmEx's results for the actions in the fourth quarter, it's clear that the company is operating at a level that's on par with (and sometimes exceeding) its competitors.

The company's revenue growth is modest in comparison to Capital One and Visa. Capital One is an outlier, however, due to two large acquisitions made in 2012: ING Direct and HSBC's US credit card portfolio.

AmEx has a decent net margin, but it only outranked Citigroup. Visa led the pack, but the company differs from the other three in the table: Visa gets most of its income from service and data-processing revenues, which can result in lower operating expenses, driving net margins higher.

American Express also has the best rate of return on equity. With impact from legal woes visible on the company's earnings, Citi's ROE is stunted. CEO Mike Corbat stated that improving the company's ROE is a priority for 2013.

American Express has made a clear statement with its fourth-quarter earnings that it is making changes within its company and looking to grow its already solid performance.

Restoring the faith
With its earnings in line and a clear plan to cut expenses and grow its business, American Express may be one of the companies to restore investor confidence in financial companies. There's even a solid case that others, like Bank of America, are coming back into favor. To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

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