American Express (NYSE:AXP) reported its second-quarter earnings on Wednesday afternoon, and with shares declining by roughly 3% after the report, it's fair to say that investors weren't thrilled with what they saw. While most of American Express' earnings report was quite strong, the company did miss revenue estimates.
In addition to the revenue miss, there was another concerning trend in Amex's earnings. Here's a rundown of four of the good points, as well as the trend I'll be watching closely over the coming quarters.
1. Excellent earnings growth
The first thing that stands out is the headline earnings number. American Express earned $1.84 per share for the second quarter, which represents impressive 25% year-over-year growth. For the full year, the company expects EPS in the range of $6.90 to $7.30.
At the midpoint, this means that Amex is trading for approximately 14 times 2018 expected earnings, which looks like an absolute bargain considering some of the other growth metrics I'm about to discuss.
2. It isn't just tax reform that's driving profits higher
To be fair, a substantial portion of the earnings growth can be attributed to tax reform. The Tax Cuts and Jobs Act lowered the corporate tax rate from 35% to 21%, and American Express' effective tax rate fell from 31.3% to 22.4% as a result.
However, some of it was good old-fashioned growth. American Express' revenue increased by about 9% from the same quarter a year ago, while expenses increased by only 7%. Revenue that grows faster than expenses is a recipe for profit growth, so it's important to mention that it isn't just tax reform that is propelling Amex's profits higher.
3. Great international growth
In addition to the solid overall revenue growth, the company's growth in its international consumer business was simply stellar. If you aren't too familiar with the company, American Express doesn't have quite as much of a global consumer presence as Visa and Mastercard, so international markets are a huge growth opportunity.
Amex is doing a great job of taking advantage. Adjusted for foreign exchange, the company's international consumer business grew by 18% year over year. On a per-member basis, non-U.S. card spending is up by 13%, and the loan portfolio (credit card balances), while still relatively small, is up by 21% from a year ago.
4. Operating expenses declined
I mentioned earlier that American Express' expenses were up by 7% from a year ago, but the increase was for good reasons. Specifically, spending on marketing and business development was 14% higher, and expenses for card member rewards grew by 11%. In other words, this is spending meant to increase Amex's business over time.
On the other hand, operating expenses actually declined by 2%, which is rather impressive considering that revenue grew by 9%. Compensation expenses dropped by 1%, as did professional service expenses.
Bad debts are on the rise
OK, time for a bit of not-so-good news. After a prolonged period of improving credit quality in the financial industry, it appears that bad debts are beginning to rise.
Over the past two quarters, American Express' lending net write-off rate has increased from 1.8% to 2.1%, and its card net write-off rate has climbed from 1.5% to 1.8%. Now, these are significantly better than Amex's peer group average, thanks to Amex's generally affluent card member base. And it's also important to mention that some increase is to be expected, as American Express continues to move its product mix from a charge card (where it's paid off each month) to more of a credit card (where you can carry a balance). However, the write-off trend is certainly moving in the wrong direction.
An overall positive report, but...
The bottom line is that despite the post-earnings drop in the stock's price, American Express had a solid second quarter. However, the trend toward higher charge-offs is certainly an area of concern that's worth keeping an eye on over the next few quarters.