When American Express (NYSE:AXP) reported its second-quarter earnings last week, investors certainly had much to cheer about. The credit card company's revenue rose to $10 billion, a 9% increase year over year, and its earnings per share (EPS) grew to $1.84, an even more impressive 25% increase over's last year's second-quarter total.

The impressive bottom-line gains can be attributed to a number of sources, not least of which are the benefits American Express is seeing from the new tax policies. Some of the earnings growth is also due to the 3% decline in number of shares outstanding, thanks to American Express' share buyback program. Still, a lot of this growth was also achieved the old-fashioned way: through organic growth of its business.

A gold-colored credit card close-up, showing a partial number and the EMV chip.

In the second quarter, American Express demonstrated growth in its three largest revenue streams: discount revenue, net interest income, and card fees. Image source: Getty Images.

In fact, Amex's top-line growth was driven by its three largest revenue streams showing high single-digit or, in the case of one standout, double-digit growth. Let's take a closer look at all three of these revenue streams to see how each fits into American Express' business model and if the growth is sustainable.

American Express Metrics Q2 2018 Q2 2017 Change
Total revenue $10.0 billion $9.2 billion 9%
Discount revenue $6.2 billion $5.7 billion 8%
Net interest income $1.8 billion $1.5 billion 19%
Net card fees $844 million $771 million 9%

Data source: American Express Company.

A big discount

By far the largest of Amex's revenue streams is its discount revenue, the fees charged to merchants for accepting American Express cards. In Q2, discount revenue rose to $6.19 billion, an 8% increase year over year and a whopping 62% of the company's overall revenue.

The average discount rate, the percentage American Express takes as a fee for each transaction, stayed constant sequentially at 2.37% for the quarter. In other words, for every $100 an American Express cardholder spent this quarter, on average $2.37 returned to the company.

In the conference call, management insisted it was focused on growing discount revenue, not increasing the discount rate, a strategy the company has maintained for several quarters. Programs like OptBlue are consistent with this strategy, allowing smaller merchants to negotiate directly with a third party for card fees. While this lowers the average discount rate, it increases merchant acceptance of American Express cards, thus enabling cardholders to use their cards more. As CEO Steve Squeri said in the conference call, "[L]ast year, we signed over a million merchants in the United States. What happens is that gives us an opportunity to go after a higher share of wallet with our existing cardmembers."

An item of interest

In the second quarter, the company's net interest income, the money it receives as interest paid on its account holders' loans, grew to $1.83 billion, a 19.5% increase year over year. This growth was primarily driven by the rise in loans. This quarter, total loans for American Express rose to $78.6 billion, a robust 16% increase over last year's second-quarter loan total.

A lot of this loan growth is taking place in international markets, as Amex saw billings in Australia and the United Kingdom both grow 20% year over year. In some of these areas, regulatory change is prompting this growth. For instance, in Australia, a law change is forcing the company to wind down its payment network in the country, which prompted American Express to launch a co-branded card with former network partners Westpac. Now, as card issuer, American Express' revenue from these transactions is much better than it was previously. As CFO Jeffrey Campbell said in the conference call in reference to this exact change, "I just remind everyone that when you replace $1.00 of network billings with $1.00 of proprietary billings, that is a really, really good trade economically."

A valued card

Finally, Amex's third-largest revenue stream is its card fees. In Q2, net card fees grew to $844 million, a 9% increase year over year. When breaking down this category in the conference call, Campbell said:

Net card fees growth was 9%, driven by growth in key international markets as well as Platinum and Delta in the US. We continue to feel good about our ability to generate card fee revenues by offering differentiated value propositions right in the face of constant competition. Another example, year to date through May, over 60% of our global consumer new card acquisitions were on fee-paying cards.

Offering differentiated services as rewards for its card members is something American Express has long worked on, including such things as increased airport lounge access for its Platinum cardholders and credits to ridesharing services. This quarter, the company added a $100 annual credit to its cardholders to use at Saks. Squeri said the benefit came at zero cost to American Express, proving that retailers coveted the attention of American Express cardholders.

Final thoughts

Amex's quarter was not perfect by any means. The company's provision for losses, funds set aside for unpaid loans, increased to $806 million. This remains a drag on earnings. Yet even with this growth in loan-loss provisions and an uptick in the write-off rate to 2.1%, the company managed to grow its EPS by 25%. The company also maintained it would hit the top part of its full-year EPS guidance of $6.90 to $7.30. Given its current price, this means the company's shares trade at a very reasonable forward P/E ratio of less than 14. With the company growing its primary revenue streams and with catalysts present to continue to these growth trends, shareholders with the proper long-term mind-set seem to stand an excellent chance of beating the market going forward.

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