American Express (AXP 0.04%) reported its 2019 first-quarter earnings last month, and there seemed to be plenty for investors to like. The credit card company's total revenue rose to $10.4 billion, a 7% increase year over year, while adjusted earnings per share (EPS) grew to $2.01, an 8% increase year over year. This growth on the top and bottom lines was driven by a rise in the company's total loans to $85.1 billion, a 12% increase over last year's first-quarter total.
Beyond decent growth in key metrics, however, there were three other reasons why investors should be pleased with what American Express is doing to ensure it remains competitive in a crowded industry: It's making efforts to increase its discount revenue, it announced more digital partnerships, and it unveiled an extended agreement with Delta Air Lines (DAL -4.40%). Let's take a close look at all three of these developments.
Amex's most important revenue stream
Discount revenue is the money American Express collects from merchants every time one of its cards is used to make a purchase. This quarter, the company's discount revenue rate was 2.37%, meaning that for every $100 spent on its cards, $2.37 went back to Amex. The company collected almost $6.2 billion in discount revenue, a 5% increase year over year and good for about 60% of the company's total revenue.
Repeating what has been the company line for several quarters now, management continues to emphasize its concern about growing this revenue stream, rather than expanding the margins of its discount rate. During the company's conference call, CEO Steve Squeri drove this point home:
"[W]hat I've been saying since day one is ... you have to look at the economics of the overall transaction. ... [W]e have $1.2 trillion ... of billings. If I put another $1.3 trillion on and it was 50 basis points of what you would call, and I'll put it in quotes here, discount rate and that was 50 basis points of profit and a discount rate was cut in half. Who cares? ... And that's the reason why we haven't really been focused on the discount rate ... and we're really going to continue to focus on discount revenue growth as we move forward."
New digital partnerships
After neglecting its digital offerings for years, Amex finally seems to be taking this part of its business seriously. On this front, Amex made several new acquisitions and partnerships to continue to bolster its digital access and capabilities for its account holders, including:
- Acquiring Pocket Concierge, a platform that allows consumers to easily make reservations at high-end restaurants in Japan
- Acquiring Lounge Buddy, an app that lets travelers find and book access to airport lounges
- Launching a new accounts payable automation solution with partner Bill.com.
- Partnered with SAP's Ariba software
Flying higher with Delta
Perhaps the biggest news of the quarter was a renewed partnership with Delta Air Lines that extends through 2030. Amex's co-brand card partnership with Delta is a large part of its business, representing 8% of total billings and 20% of total loans. Losing it would have almost been a repeat of the Costco debacle, which ultimately sent Amex's stock price into a tailspin that took years to recover from.
As Squeri made a point to highlight, the Delta partnership checks off several of the right boxes for American Express and makes sense on many levels. For starters, Delta, like Amex, focuses on a premium consumer base for its clientele. Delta also has a large base of business customers, giving American Express the opportunity to target new commercial users. Finally, Delta's international presence gives Amex an opportunity to reach new international customers through this partnership. Squeri concluded:
"The Delta relationship is now positioned to remain a key element in our strategy of growing our share, scale and relevance, producing great returns for our shareholders. ... [T]ogether we've acquired more than 1 million new accounts in each of the past two years. With the certainty of our relationship now locked in until 2030, we can work together even more closely to sustain this momentum, growing the value every year for our mutual customers and for both partners."
Still a good value
Based on the midpoint of the company's full-year 2019 guidance, shares of American Express currently trade at a forward P/E ratio of about 14.5. For a company focused on delivering quality growth, that seems like a decent value in a bull market growing long in the tooth.