We have retained our Neutral recommendation on American Express Co. (AXP - Free Report) following impressive second quarter results. However, we maintain a Neutral outlook as we expect lower borrowing on cards and rising payment of outstanding debt to raise interest expenses and impede loan fee income in future. This diversified financial services company currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
American Express’s second-quarter earnings came in at $1.27 per share, surging almost 10.4% year over year. Results also surpassed the Zacks Consensus Estimate of $1.21 cents per share by 5%. Over the last 30 days, although one out of eighteen estimates moved up, there was no change in earnings momentum, keeping the Zacks Consensus Estimate for 2013 at $4.85. However, this translates to a year-over-year improvement of 10.3%.
American Express holds a leading position in the high-growth card payment and lending arenas. American Express has a strong revenue generating platform that has helped it pull itself out of the recession more quickly than its peers. The company’s focus on revenue mix diversification in the areas of e-commerce, mobile payments and fee-based businesses through its ongoing EGG program is commendable in this regard.
Additionally, the recent shift toward EMV chip-based technology to accelerate mobile payments and the launch of a Fraud Liability Shift policy is expected to strengthen the company’s digital platform. Such low risk and high return strategies are expected to generate 12–15% earnings accretion for the company in 2013.
Despite the regulatory hassles in the industry, the company has the ability to achieve robust inorganic growth. American Express’ acquisitions (General Electric Company’s commercial card and corporate purchasing business, Revolution Money, Loyalty Partner, Payment SDK’s digital operating system) enabled it to reach out to more customers. Further, American Express’ global market penetration has strengthened through its association with companies like Facebook Inc. (FB - Free Report) , Morgan Stanley (MS - Free Report) and Barclays Plc (BCS - Free Report) .
Additionally a strong capital position of the company, fair liquidity and a low risk profile of American Express also augur well for the purpose of retaining investor confidence.
However, sluggish net interest yields and low interest rate environment continue to abate the interest income of the company. Moreover, operating expenses could increase in future quarters owing to the re-pricing actions and the increasing card member rewards and service costs. Also the company being exposed to non-U.S. activities is susceptible to currency fluctuation, varied tax rates and foreign exchange controls.
American Express’ participation in some government programs also deters financial flexibility and weakens its competitive edge. The company’s recent decision to divest its publishing business to Time Inc. pertains to problems faced by engaging in non-financial activities owing to banking regulations.