When American Express (NYSE:AXP) reported its 2018 fourth-quarter earnings earlier this month, investors did not seem to know how to react. At first, shares of the credit issuer dropped precipitously, but by the end of the day, they had recovered enough to show a slight gain.
In the quarter, revenue rose to $10.5 billion, a 10% increase year over year (once adjusted for foreign currency fluctuations -- otherwise 8%), and adjusted earnings per share grew to $1.74, an 11% increase year over year. This marks the sixth consecutive quarter in which the company saw revenue increase by at least 8%. Here are some of the most noteworthy figures from the company's fourth quarter:
|American Express Metrics||2018 Q4||2017 Q4||Change|
|Total revenue||$10.47 billion||$9.71 billion||8%|
|Total loans||$85.7 billion||$76.1 billion||13%|
|Net write-off rate||2%||1.8%||0.2 percentage points|
The increases in the company's top and bottom lines were driven by a number of catalysts. Let's take a closer look at the three most important aspects of the performance from this quarter to determine why American Express still makes a good investment:
1. The best lender in the industry
American Express continues to show why it's considered the best lender in the credit industry. In Q4, Amex's loan portfolio grew to $85.7 billion, a 13% increase year over year. Incredibly, it did this while the net write-off rate, the percentage of loans that the company no longer expects to collect, actually dropped sequentially to just 2%, far lower than the industry average. In the quarterly conference call, CEO Steve Squeri said, "Our 2018 credit performance was a little better than we expected, and the data we derive and analyze from all the parties in our integrated payments platform helped us maintain industry-leading write-offs."
The company's provision for loan losses, money it sets aside for expected upcoming loan losses, did grow to $954 million, a 14% increase year over year. Management stated this increase was due to high loan growth and normal seasoning of newer accounts. CFO Jeffrey Campbell stated:
More broadly as we look at the fourth quarter, we do not see anything in our portfolio that would suggest a significant change in the credit environment. We continue to feel good about our ability to capture lending share from existing customers while retaining best-in-class credit metrics. These best-in-class metrics led to the $954 million in provision in the fourth...This is a better outcome than we originally anticipated, as the provision growth reflects better-than-expected credit performance, somewhat offset by there also being slightly higher loan growth than we originally expected.
2. Amex's most important revenue stream
The largest contributor to the company's top line remains its discount revenue, the money it collects from businesses every time its cards are used to make a purchase. In Q4, this revenue line item rose to near $6.5 billion, a 7% increase over last year's fourth quarter, good for 62% of the company's overall revenue. The company is growing this category by making a conscious effort to raise the number of locations that accept American Express -- and, for the second year in a row, it added more than 1 million locations in the U.S.
One of the successful ways it has effectively grown this revenue is by making a conscious effort to lower the discount rate, the percentage that American Express takes for each transaction. Management understands that if it takes less for each transaction, but can drive total transactions, it can still come out ahead. This quarter, the discount rate dropped to 2.36%, down a tick from Q3's 2.38% discount rate. In the conference call, Squeri credited OptBlue, the program to promote American Express acceptance with smaller merchants, for much of this success to expand merchant coverage, saying it effectively removed pricing as a reason for small and medium-sized businesses to not accept its cards.
3. A unique value proposition
Finally, American Express premium cards often come with annual fees, money that cardholders seem more than willing to part with for the hefty rewards that come with using the cards. In 2018, Amex issued 12 million new cards. In Q4, the money it collected in card fees rose to $897 million, a 14% increase year over year and representing 8.6% of the company's total quarterly revenue.
Squeri believes that as long as the company continues to add value to its cards, this number can continue to grow well into the future. One of the ways it can do this is by offering rewards that competitors find hard to match, such as lounges at major airports. In the conference call, Squeri concluded: "The 2018 results reinforce our view that card members appreciate the unique benefits and services we provide. They recognize and are willing to pay for value..."
American Express remains a compelling value for shareholders looking for quality companies continuing to grow at double-digit rates. For 2019, the company is expecting to grow revenue by 8% to 10% and projects EPS to fall in the range of $7.85 to $8.35. The midpoint of that range would represent a 10.5% increase over 2018, giving the company a forward P/E of just 12.4. For a company expecting double-digit EPS growth, with a proven track record for responsibly issuing credit, and a growing digital presence, American Express shares seem like a good bet to beat the market in the foreseeable future.