Electronic payment processor in the US,
American Express Co.
) (AmEx) is scheduled to release its fourth-quarter 2011 results
after the market closes on January 19, 2012. The Zacks Consensus
Estimate for the fourth quarter is 98 cents per share, representing
about 4% growth over the year-ago quarter.
Following the trends of the first three quarters of 2011, AmEx
improved credit quality with an increased usage of cards, lesser
defaults, higher spending and growth in loan portfolio, which have
not only reduced provision for losses but are expected to drive
earnings and return on average equity (ROE). Moreover, the
company's efforts to expand in the prepaid and eCommerce spheres
will further accentuate long-term growth. However, higher operating
expenses and lower interest income may continue to limit the
Previous Quarter Performance
AmEx, reported third-quarter 2011 operating earnings of $1.03
per share, comfortably ahead of the Zacks Consensus Estimate of 96
cents and 90 cents recorded in the year-ago quarter.
Meanwhile, net income from operations increased 13% year over
year to $1.24 billion from $1.09 billion in the year-ago period.
However, no extraordinary items were recorded during both the
AmEx' card members' spending increased 16% over the prior-year
quarter. The uptick came from international cards in force that
rose about 11.5% year over year to $45.6 million while cards in use
grew 4.3% year over year in the US.
AmEx posted total revenue, net of interest expenses, of $7.57
billion, up 9% year over year from $6.97 billion while marginally
exceeding the Zacks Consensus Estimate of $7.58 billion.
Additionally, the increase in revenues was supported by higher
spending and higher travel commissions from card members coupled
with improved loan portfolio. This was partially offset by sluggish
growth in interest income due to lower yields.
Provisions for losses were $249 million, sinking 33% from $373
million in the prior-year quarter. The year-over-year decrease in
provisions for losses was primarily driven by continued improvement
in credit quality on the charge and credit card portfolios.
However, lending balances and yield continue to remain
Agreement with Analysts
Ahead of the earnings release, we see some downward movement in
analyst estimates over the past 30 days. A similar trend has been
noticed over the past 7 days. Hence, the estimate revision trends
and the magnitude of such revisions justify a cautious sentiment on
the street. This indicates the ongoing sluggish economic
environment, primarily in the US and Europe, although Asia could
In the last 30 days, one of the 16 analysts revised its estimate
downward for the fourth quarter and full year of 2011, while no
upward revisions were witnessed. This implies that the analysts do
not foresee any directional pressure on the results.
Meanwhile, the neutral approach toward AmEx also gives scope for
some positive surprises in 2011, particularly, as the company is
gearing up its prepaid debit card business, which has now become
the fastest growing form of electronic payments. The company's
ongoing Enterprise Growth Group (EGG) program has been focusing on
diversifying its revenue mix in the areas of eCommerce, mobile
payments and fee-based businesses in emerging markets through
Magnitude of Estimate Revisions
In the last 90 days, there have been modest revisions in the
earnings estimate following the third quarter results. As a result,
earnings per share increased by a couple of cents from the current
level of 98 cents for the fourth quarter, while the same grew by a
nickel to $4.04 for 2011. Furthermore, earnings per share inched up
by a cent to the current estimate of $4.17 for 2012. However, this
trend of earnings growth projection indicates a blurred outlook in
the analysts' opinion given the lack of clarity on the expense
front and the macroeconomic volatility.
Going by past trends, we have a slightly mixed opinion on AmEx
exceeding estimates, given the uncertain economic and regulatory
environment hanging around AmEx and its peers. The company's
reported earnings per share exceeded its expectations in all of the
last four quarters and has a positive four-quarter average surprise
AmEx has been upgrading its digital payment platform through
strategic alliances, which will not only expand the company's card
membership base but also help it to penetrate the unexplored market
and tap the upcoming opportunities in the field of eCommerce.
AmEx's low risk and high return strategies are expected to generate
over $3 billion in fees from these activities within five
Besides, AmEx's major re-engineering program to increase
efficiency and reduce activities that do not support its highest
preference. Further, projected pre-tax re-engineering charges of
$50-60 million (down from $60 80 million) in 2011 are expected to
generate annual cost savings of $70 million from 2012 onwards. The
company generated $300 million from employee plans in the second
quarter of 2011. While the re-engineering program is expected to
complete by the end of the second quarter of 2012, the company
estimates to reduce its global workforce by 550 net positions in
AmEx also enjoys a strong capital position with a Tier 1
risk-based common ratio of 12.3%, at the end of the first nine
months of 2011, well above the current regulatory requirement under
Basel III and 11.1% at 2010-end. On a cumulative basis, since 1994,
the company has distributed about 64% of capital generated through
share repurchases and dividends. The company expects to repurchase
the remaining $350 million of stock, under the current $2.3 billion
share authorization, in the fourth quarter of 2011. Besides
sustaining over 25% ROE growth, going ahead, management expects to
invest 50% of its excess capital in the business while paying out
the remaining to the investors as dividends and share buybacks.
However, though improved credit trends, capital flexibility and
stable rating bode well for long-term growth, settlement payments
) that ended in 2011 will limit the expense growth. Besides, lower
yields on the portfolio overshadow the increased card spending.
Meanwhile, we expect lower borrowing on cards along with rising
payment of outstanding debt to lower interest and loan fee income.
We also remain cautious about the impact of increasing operating
expenses, regulations, intense competition, volatile economic
outlook and lawsuits. Nevertheless, a spend-centric business model,
healthy capital and the targeted 50% payout ratio warrant enhanced
growth in a stable market in the long run.
The quantitative Zacks Rank for Amerisafe is currently #3, with
a short-term Hold rating, indicating no clear directional pressure
on the shares over the near term.
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