American Express (AXP): Transition Ongoing

Posted on Oct 22 2015 - 2:28pm 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 and many.

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

One can become familiar with the business 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 listening to my thoughts on the economy. You are listening to board members discuss the very real issues they face as they manage corporations worth billions.

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. Perhaps, we can make this a continual feature here at Sharpe Trade with the stocks that we have mentioned in the Sharpe Income project.

American Express (AXP) reported earnings on the 21st of October, after which the stock’s price dropped about 5.7%. 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.

American Express (AXP) – Daily Chart

American-Express-AXP-Chart-10-22-2015

So what’s ‘the low-down’?

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 with the associated slides

American Express (AXP) – October 21, 2015

  • $1.30(5) Est. / $1.24 in Actual EPS.
  • Net Income … 1.3 Billion in Net Income, down 14 percent from 1.5 billion one year ago.
  • Earnings per share (EPS) of $1.24 down 11 percent from $1.40 a year ago.
  • Revenue of 8.2 Billion, down 1 percent from 8.3 billion a year ago.
  • Results for the quarter were “significantly affected by higher spending on growth initiatives.  Excluding the impact of foreign exchange rates, adjusted revenues rose 3 percent.
  • Consolidated provisions for losses totaled $529 million, up 8 percent from $488 million a year ago, which is derived from addition to reserves in the current year.
  • Expenses totaled $5.7 billion, up 3 percent from 5.6 billion, up 3 percent, but on an FX adjusted basis, expenses rose 7 percent, from higher spending on the Growth initiatives.
  • Effective tax rate increased from 34 percent a year ago, to 35 percent.
  • ROE was 26.8 percent, down from 28.8 percent a year ago, though over the target they set for themselves of 25%.
  • Costco relationship set to end in the U.S. next year, they are investing more in marketing, incentives and technology to attrance new Card Members.  
  • Expanding card acceptance at an accelerated pace among smaller merchants and added Sam’s Club to the network.
  • Loan portfolio continued steady growth in this quarter.
  • Write-offs at historically low levels.
  • Last quarter they had stated they expected 2015 to see EPS “flat to modestly down”, specifically now with just a short time left in 2015, EPS believe will be 5.20 and 5.35 for the full year.  Outlook 2 year guidance of 12 to 15% growth remains … but that’s two years … so ….
  • Billing was flat versus prior year.  Revenues down 1%, but up 3% adjusted for FX.  Net income down 14% … and they state this has to do with the Dollar, (getting to be a weak excuse), contractual relationship changes, and spending on growth initiatives.  Shares outstanding has shrunk 5% due to buybacks.
  • Billed business by region shows EMEA doing well and consistent, and Japan and China doing well.  With the U.S. consistently lower. LACC down significantly, due to Costco / Canada.  Outside of Canada, LACC doing well.
  • Billings in U.S. impacts comes from an increase in the number of transactions, but a decrease in the size of the transactions.  Transactions increased 7% from the same time last year, but the transaction size decreased -3%.  Auto and Airline spending driving this.  
  • Worldwide loan growth did well last quarter.
  • Like IBM, citing U.S. Dollar strength.  Here, American Express (AXP) has provided more detail in saying that the U.S. Dollar continued to strengthen (though the Index is down) on the currencies in countries that AXP is exposed to, providing a challenge.
  • Questions and Answers: Began at 31:02.  Stated  that as long as U.S. Dollar doesn’t move 30% higher in 2015, they should have an easier time with FX next year.

As with IBM, American Express (AXP) is a company that is undergoing somewhat of a transition.  On that route, there is not a whole lot to report.  They’re simply slogging through the work of growing new businesses, with the loss of Costco.

Although the transition of American Express (AXP) is nothing as involved as the transformation that IBM is attempting, it seems given the stated EPS guidance for this year and next, any look of American Express (AXP) on a valuation basis has them trading just in the neighborhood of at-value.  

However, if we assume almost no growth on American Express (AXP) for the next two years, even with an 18 P/E, it makes sense to continue to hold American Express (AXP).  Since my time-frame is 10 years, I will continue to hold American Express (AXP) for the moment.

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