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American Express Reaps Its Costco Gains and Looks Ahead

By Dan Caplinger – Jul 20, 2016 at 6:39PM

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The card giant's revenue declined slightly, but profits were better than most expected even including gains from its co-branded card portfolio.


Image source: American Express.

Ever since American Express (AXP 0.14%) announced that it had ended its co-branded credit card agreement with Costco Wholesale (COST -0.15%), investors have worried about the net impact on the card giant's business. After a full year of transition, American Express finally ended its relationship by selling off its remaining portfolio connected to the warehouse retailer. Coming into Wednesday's second-quarter financial report, American Express investors knew that the one-time gain would push earnings higher, but they still wanted to see the underlying business hold up as well as it could. American Express' results showed some signs of weakness, but they nevertheless outperformed what most of those following the stock were looking for. Let's take a closer look at how American Express did and how it's looking ahead to the future.

American Express gets the job done

American Express' second-quarter financials were mixed. Revenue inched downward by less than 1% to $8.24 billion, and that fell short of the 1% growth that investors had wanted to see. Net income jumped 37% to $2.02 billion, and that worked out to earnings of $2.10 per share. That figure was $0.15 per share higher than the consensus forecast.

Looking more closely at American Express' numbers, the card company said that revenue took another hit from the strong U.S. dollar, but the size of that impact has lessened in recent quarters. On a constant currency basis, revenue would have risen by 1%, and American Express said that it brought in more money from higher net card fees and net interest income. However, it specifically pointed to lower Costco-related revenues as an offsetting factor on the top line. Loss provisions were down 1% from the year-ago period, weighing in at $463 million. Yet returns on average equity once again edged downward, falling a bit less than two percentage points to 26.4%.

American Express' major segments showed interesting trends. The U.S. Consumer Services segment saw net income jump by nearly three-quarters thanks to the Costco portfolio sale, but revenue fell 3%. Expenses for the segment fell by two-fifths, again because some of the proceeds from the sale of the card portfolio had the impact of cutting expenses. Meanwhile, the company's International Consumer and Network Services reported an 18% rise in net income on 6% revenue growth, overcoming five percentage points of pressure from the strong dollar. Global Commercial Services saw a smaller profit gain of 5% on flat sales, and the Global Merchant Services division saw revenue drop 3% but managed to squeeze out a 1% advance on the bottom line.

American Express CEO Kenneth Chenault characterized the report as solid. "We are making good progress on our initiatives to accelerate growth," Chenault said, "acquiring 3 million new proprietary cards worldwide, generating additional spending on our global network, expanding merchant coverage, and continuing to meet the borrowing needs of card members while maintaining strong credit quality."

What's ahead for American Express?

American Express hasn't hesitated to take aggressive steps to go beyond its Costco experience. Substantial marketing and technology investments have produced some growth, and cost management will remain important in keeping AmEx's bottom line moving higher. Chenault expects spending levels to remain elevated for the rest of the year to fully capitalize on growth opportunities while remaining competitive.

Even with higher costs, American Express is optimistic about its immediate future. The company said that it expects its 2016 results to be toward the high end of its previous guidance range, which included earnings projections for the full year of between $5.40 and $5.70 per share. The company made no changes to its 2017 guidance for about $5.60 per share in earnings, and its focus will remain on getting back into full growth mode.

Investors didn't seem entirely satisfied with the news, however, as the stock fell more than 1% in after-hours trading following the announcement. In the long run, though, American Express needs to keep finding ways to recover in a post-Costco environment, and it will take time for its efforts to bear fruit.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool recommends American Express. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

American Express Stock Quote
American Express
AXP
$154.15 (0.14%) $0.22
Costco Wholesale Stock Quote
Costco Wholesale
COST
$533.66 (-0.15%) $0.83

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