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American Express (AXP) Q4 Earnings: A Beat in the Cards?

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We expect American Express Company (AXP - Free Report) to beat earnings expectations when it reports its fourth-quarter and full-year 2016 results, after the market closes tomorrow.

Over the past three months, shares of American Express gained 27.5%. The price reaction was largely driven by the post-election rally over optimism for faster growth in economy and benefit from potential tax cuts.

Will the rally in stock price continue post fourth-quarter earnings release? It majorly depends on whether the firm is able to maintain its trend of beating earnings over the last four quarters.
 

Why a Likely Positive Surprise?

Our proven model shows that American Express has the right combination of two key ingredients to beat earnings.

Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands +2.04%. This is a major indicator of a likely positive earnings surprise for the company.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank #3 (Hold): American Express carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) and 3 have a significantly higher chance of beating earnings.

The combination of American Express’ Zacks Rank #3 and ESP of +2.04% makes us confident of an earnings beat on Jan 19. Notably, the Zacks Consensus Estimate of 98 cents reflects a year over year decline of 20.3%.
 
Factors to Influence Q4 Results

Revenue is likely to benefit from American Express’ key initiatives to accelerate growth by driving new card acquisitions across its global consumer and commercial portfolios and expanding merchant coverage. Some of the strategic measures of the company include renewed focus on its Platinum Card portfolios in the U.S. and additional spending to leverage on the ongoing expansion of its merchant network in the U.S. through OptBlue program.  

Notably, these measures, combined with the strong shopping season in the fourth quarter, should prove to be a positive for the company. Overall results of American Express should get support to some extent as consumer spending remained decent amid the improving economy.

American Express has gradually shifted its portfolio mix towards non-co-brand card members after experiencing declines in co-brand loans. Management believes that this mix change results in decent returns. It also noted that though the mix leads to slightly higher write-off rate, it has  no material impact on the overall credit profile. As such, quarterly results are likely to reflect continued loan growth.

Management had earlier acknowledged that the weakening of the British pound, since the Brexit vote in Jun 2016, has been affecting the company’s reported billings and revenues. However, it believes that, from an earnings perspective, the company is relatively hedged against the pound as the UK serves as the headquarters for many of American Express’ international operations.

Regarding expenses, reflecting investment spending, marketing and promotion expenses are expected to exhibit a slight increase on a sequential basis. However, American Express’ consistent efforts to trim its cost base may ease some pressure on the expense base.

Excluding the impact of restructuring charges, management had guided for adjusted EPS in the range of $5.90–$6.00 for 2016.

Stocks that Warrant a Look

Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

Ameriprise Financial, Inc. (AMP - Free Report) is slated to release results on Feb 1. It has an Earnings ESP of +0.82% and carries a Zacks Rank #3.

CBOE Holdings, Inc. (CBOE - Free Report) has an Earnings ESP of +3.45% and sports a Zacks Rank #1. The company is slated to release results on Feb 6. You can see the complete list of today’s Zacks #1 Rank stocks here.

Discover Financial Services (DFS - Free Report) is slated to release results on Jan 24. The company has an Earnings ESP of +0.73 % and a Zacks Rank #2.

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