American Express (AXP): Competitive Guidance Adjustments

Posted on Jan 27 2016 - 3:34pm by Dan

For years, I have stated that new retail investors should tune into companies quarterly conference calls, presented to Shareholders. The benefits are numerous.

It only generally takes one hour or so, every three months.

One can become familiar with the businesses with which one is invested.

One can listen to the board members of various corporations around the planet, as they attempt to manage businesses worth billions of dollars. You’re not listening to some doofus and his thoughts on the economy who has no stake in issues facing the economy. You’re not even listening to my thoughts on the economy. You are listening to board members discuss the very real issues they face as they manage multi-national corporations.

When I listen to the conference call of a company, I take some notes. And therefore … I thought that to help out new folks as they navigate conference calls, I would start posting my notes, as I’ve taken them. We have made this a continual feature here at Sharpe Trade with the stocks that we have mentioned in the free Sharpe Income project.

I’ve been a little ‘behind’ during this earnings season, getting caught up on all of the calls.  But we should do so now.  American Express (AXP) recently reported earnings on January 21st, 2016.  The stocks price has dropped by approximately 11.30 % since they released earnings.  As I have mentioned previously here on Sharpe Trade, this is a stock that I use in the equities section of my own personal income accounts.  I hold no AXP for valuation accounts.  This is purely a piece, a cog, in my Income accounts …

American Express (AXP)
1 Hour Chart

American Express AXP Chart Earnings

So what’s ‘the low-down’ for this quarter?

You can find my notes on last quarter’s earnings here, and as follows are a few notes from my desk as I listened to this quarters Conference Call and looked over the headline numbers …

American Express (AXP) – From January 19, 2016

  • $1.12(8) Est. / $1.23 in Actual EPS
  • Revenues were down 8% year-over-year and they are citing stronger U.S. dollar.
  • Delivered Total Revenue of $8.79 billion, up from $8.59 billion (2.328%) last quarter, but down from $9.48 billion one year ago (-7.278%).  Operating Income of $1.45 billion, down from $1.93 billion last quarter (-24.87%), and down from $2.2 billion from one year ago (-34.09%).
  • Profit and Operating Margins obviously sliding again.  Balance sheet, debt inching up just slightly, and leverage is at 7.59.
  • View of 2016 has changed.  This call to focus discussion of what they plan to do about it, and still believe they can grow over the medium to long-term.
  • I hear on this call (again) ‘that there are complexity to our results‘, which after going through it, I’ll grant them.  But the results in the short-term seems pretty simple and clear to me
  • Billed Business with FX Adjustment, increased 5% in the 4th quarter, and 6% in 2015, but decreased modestly in the last half of the year.
  • Revenues are down 8%, as outlined previously.  I can see this, as in the prior year, they had the sale of Concur, which beefed the revenues at that time.  There was a 4% gain, not a loss … adjusting for FX and the Concur sale of last year.
  • There has been restructuring charges, and they state they have had a ‘Goodwill’ impairment (I’d believe that).
  • Fits with the performance statements they previously made, as this is at the higher end of the range of the Q3 call.
  • They still believe they have healthy loan growth, strong card acquisitions, excellent credit performance, disciplined operating expense controls.
  • Early renewals of co-brand relationships with various airlines (Delta, Starwood, British Airways, Cathay Pacific, and Iberia), along with the end of relationship with Costco in Canada, reduced EPS in the quarter and the year by approximately 5%. Done lapping these changes as we enter 2016.
  • U.S. dollar continued to strengthen as the year progressed, reducing EPS by another approximately 3% to 4% for both the quarter and the year.
  • Decision to increase spending on growth initiatives for the year remaining at the elevated levels AXP was at in 2014 further pressured earnings in 2015 and AXP intends to stay at these levels throughout 2016, before returning to lower levels in 2017.  Also cited competitive and economic macro challenges.
  • Share count reduced by 5%.
  • Billed Business by Region:  (Slide 3) Total Billings Growth about flat on an FX adjusted basis, with EMEA down, LACC back to baseline 0%, up from -5%, U.S. about flat, and Japan up and healthy.
  • Card Member Loans:  Down 17% on a reported basis, due to reclassification as “held to sale”.  Worldwide up 7%, and U.S. Load growth up 10% adjusting to the reclassification.
  • Revenue Performance:  Net Interest Income increased 9%.
  • Write-offs remain at the lowest among peers.
  • Great increase in Capital returned to Shareholders with a dividend payout ratio approximately 22%.  Cited a 60% increase in dividend yield, and ok … but come on guys.  It’s a 2.10% yield, and that’s AFTER the slide in the stocks price.  Which is a bit of a valuation piece … but come on, the DPR was at 11% just a few short years ago.
  • 2016 and 2017 EPS outlook:  Have not seen volume and revenue growth accelerate as AXP expected over the past year. The competitive, economic, and regulatory environment has become more challenging. As a result, AXP becomes more cautious in outlook and now expect AXP earnings per share during 2016 to be between $5.40 and $5.70.  Turning to 2017, AXP now targeting to earn at least $5.60 per share.
  • Returning to the base question at the outset:  “what they plan on doing about it, and still believe they can grow over the medium to long-term” … Answer:  Changes that are reshaping the payments industry (co-brand economics, regulatory and competitive pressure on merchant fees and intense competition for customers, as well as Global Macro).  Actions to co-brand space, accelerating contract talks with partners, we focused on those where we can earn attractive returns and provide strong customer value, which led us to deals with Delta, Starwood, Cathay Pacific, British Air and Charles Schwab.  Contained operating expenses and restructured many areas of business. Now set to initiate Billion Dollar Improvement program.  Stepped up investments in international business with strong results, adjusted billed business rose by 12% last year.  OptBlue program continues efforts to move toward parity coverage with the other card networks in the U.S.  Streamlined management structure, creating integrated consumer, commercial and merchant teams to accelerate growth.  They state they understand they operating within a ‘new reality’, and the above are the actions they are taking to adjust to this new reality.
  • Questions and Answers:  Question:  On the 2016 guidance (between $5.40 and $5.70) … as far as a payout ratio, is there a set limit?  Answer:   It’s fluid according to capital structure, and obviously, what the Fed allows for moving forward.  Question:  How much of the $1 Billion cost cutting can be tuned to Costco? Answer:  Costco is 20% of AXP loans and net interest income is only about 18% of AXP income statement so they are about 8% of AXP billings for the co-brand, another 1% for other merchant acceptance.  Question:  What is kind of the center piece of that growth is that coming from premium cards, credit cards, star cards?  Answer:  Really across the board seeing this card acquisition growth.  Question:  Is the change mainly coming from the competitive environment affecting the business? And maybe just specifically talk about what’s changed over the last three to six months?  Answer:  We clearly did have an expectation that you would a significant sequential strengthening in both volumes and revenues. And as we went through the year that clearly did not happen.  We have a financial model that has lots of levers and we can pull those levers at different times. With regards to the end of the year though and looked at a full year revenue growth not being where we thought it would be, we concluded it didn’t make sense to pull the levers as hard as we would have had to pull them to get to where we had hoped to get to in 2016 and 2017. And so they have adjusted course.  2015 had oil that kept going lower,  FX that kept going against AXP, the economy was weaker than people thought and you have accumulative impact of regulation and competition.  Question:  Concerning the competitive backdrop and the change in how competitors are looking at their economics, how can you maintain the model long-term that has traditionally allowed AmEx to be valued at a premium to competitors?  Answer:  Progress made on lending and that is growing better than the industry with industry leading credit performance.  AXP getting good spending on those cards, which is working well for AXP on the issuing path.  AXP feels good about the viability of spend centric model.  $4.8 trillion were spent by small businesses, but only 10% of that was on plastic and where AXP is the market leader in small business. So AXP thinks that it is not just the payment industry dynamics that they are competing with in this case, but also competing against cash checks and the fact that only 10% of 4.8 trillion is on plastic suggests there’s a strong opportunity AXP can do the same thing in middle market.  With International, a range of markets where the penetration against plastic is relatively low and AXP has actually achieved pretty good growth rate, so 12% in billings growth in a number of markets AXP growing faster than the market. There’s a reset on co-brand economics. That certainly is a challenge, but they stated that they did not believe they were overly dependent on co-brands and AXP thus has a range of opportunities that they are pursuing.   Then a lot of questions on modeling due to Guidance.  And then, wow, a few stupid questions asking them to reveal exact specifics that couldn’t be answered due to competitive sensitivity, and the non-linear need to adjust as conditions evolve.

Briefly put, American Express (AXP) is in the middle of a adjustment to it’s overall strategy due to the challenging macro environment, but specifically the changes and reset on co-brand economics.  Any benefits from the adjustments they are making, should not be seen for some time.  This is not a value buy at the moment, despite what valuation metrics might tell you.  We need time to pass, to see how this business will continue to evolve.

3 Comments so far. Feel free to join this conversation.

  1. mappy January 27, 2016 at 10:57 pm - Reply

    It’s a real difficult environment this year so far. Thanks for all you do.

    • Dan January 28, 2016 at 7:09 am - Reply

      It really is. It’s taking a lot of adjustment on the part of corps to adapt, and it takes them quite a while to do so, due to their size.

      D

      • mappy January 30, 2016 at 2:01 am - Reply

        strong volume to the upside. Nice call!

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