After the close, American Express (AXP) reported solid earnings that were in line with expectations, and under the surface, impressive in the current macro-mixed environment. Billed business, total revenues, expenses, and credit trends were all in line and positive in our view.
The one thing we were watching for was for a decline in Marketing & Promotion and Rewards expenses, as it was much higher in the second quarter (up 25% and 11% respectively), and it was the reason the shares have fallen 12% since then. We got back into the shares following the initial 9% decline, because we see this moderating going forward, and we got the first signs of such this quarter.
Investors want the billing growth but not at the levels of higher expenses. We expect this spending will continue to normalize in the second half of 2014 and lead to positive operating leverage in 2015. Into the market volatility, if shares are down, we are buyers.
AXP has a quality management team, a strong global franchise, and strong growth initiatives (small/medium business, merchant, digital, mobile, online) that position it well in the future. We also like the fact that it is a financial stock that is less dependent on interest rates (although that and lower gas prices certainly would be nice tailwinds) to meeting its financial targets.
Third-quarter earnings were $1.40 vs. $1.36 consensus and up 12% year-over-year on $8.3 billion in revenue. The revenue was in line with consensus and up 5% year-over- year, adjusted for the spin of its business travel joint venture, and up 6% on a currency-adjusted basis. Discount fee revenues rose 5% and net card fees rose 3% -- this is 70% of total revenue contribution and we think it is very solid.
Consolidated expenses fell 5% but excluding the travel divestiture, they rose 1% -- better than the 2%-to-3% increase we've seen over the last few quarters. ROE was 28.8%, up from 24.3% year-over-year and is the industry gold standard.
Billed business/card member spend accelerated to 9% from 8.7% last quarter, which was in line with expectations and strong in the current macro environment. This is one of the key metrics for the stock, and we view it as a very solid number, which is poised to accelerate in 2015 following the aggressive spending the company is making this year (the U.S. accounts for 81% of operating income).
Billed business/card member spend by region is as follows: Japan billed business grew 16% year-over-year vs. 11% last quarter, U.S. rose 9% vs. 9% last quarter, EMEA rose 7% from 6% last quarter, and Latin America rose 8% from 9% last quarter – all very strong results in our view.
Loan balances rose 5%, consistent with last quarter, and should also gradually rise as the economy improves into 2015. Net Charge-offs fell to 1.5% from 1.6% last quarter and 1.7% year-over-year, and 30-day delinquencies were 1.1% up a tad from 1% last quarter – very solid and industry best.
In addition to billed business spend as the key metric, the spending on Marketing & Promotion and Rewards came down from the very high levels seen last quarter. These are expenses tied to building out its partnerships with companies like Uber, Apple Pay, McDonald's, Amex EveryDay (credit cards that allow balances) and OptBlue (3rd party deals to build smaller merchant relationships). While it is very important to continue to spend for growth initiatives, we wanted to see this come down from the higher-than-expected levels seen last quarter. Marketing & Promotion expense came in at $809 million vs. $985 million quarter-over-quarter and Rewards fell to $1.6 billion vs. $1.8 billion quarter-over-quarter.
Breaking it down by region: In the U.S. (81% of operating income), net income rose 14% year-over-year to $889 million. Total revenues rose 6% to $4.5 billion vs. $4.3 billion with 9% growth in card member billed business/spending with 6% growth in average loans. Provisions for losses rose 11% year-over-year to $316 million vs. $285 million last year but reflect a larger reserve release from last year – and still very low on an absolute basis. Total expenses increased 2% (higher rewards expenses) and in line with expectations.
International (19% of operating income) was flat year- over-year at $142 million. Total revenues rose 3% year- over-year and 5% year-over-year currency adjusted on higher Loyalty Partner business and higher billed business offset by lower net interest income. Provisions for losses were 2% year-over-year to $98 million and total expenses rose 4% year-over-year on higher marketing/promotion and rewards spend. Global Network & Merchant Services net income rose 9% year-over-year, revenues increased 5%, 6% constant currency on higher member spend. Expenses were flat year-over-year.
The payout ratio was 89% in the quarter, up from 87% last quarter and 86% last year. With a Tier 1 Common ratio of 13.6%, we expect the company to gain approval next year from the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) program, to be able to buy back another 4% of its shares outstanding. It has $2.3 billion left to buy back stock between now and the end of the first quarter of 2015.
Regards,
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUSwas long AXP.