We have retained our Neutral recommendation on
American Express Co.
) 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
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.
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