American Express Q3 Earnings Preview: Key Trends That Will Impact Performance

American Express (NYSE:AXP) is slated to report earnings for the third quarter on Wednesday, October 15. ^[1] The company reported a 10% increase in its net income to $2.9 billion during first half of 2014, driven by healthy trends in the U.S. market as well as increasing average card member spending internationally. At the end of the second quarter, average card member spending crossed $3,100 in international markets, compared to about $4,100 in the U.S. ^[2]

Below we focus on key trends that will likely have an impact on the third quarter earnings for the company. We have a price estimate of $104 for AmEx’s stock, nearly 20% higher than the current market price.

See our complete analysis of AmEx’s stock here

U.S. Consumer Sentiment Hits New High

AmEx has a core customer segment with households having annual income of at least $95,000-100,000, who fall in the higher-spending segment. In the last quarter, average cardmember spending rose 9% year-over-year (y-o-y). The U.S. consumer sentiment index score, which represents expectations of improvements in income, spending, buying preferences and financial stability, rose to a new high in September. This has been on the back of improving economic growth as well as stronger consumer sentiment. ^[3]

Lower Delinquency Rates. Positive Industry Trends To Aid Growth

With an industry-wide improvement in key trends supporting growth for credit card companies, AmEx should benefit going forward. Seasonally adjusted total outstanding revolving consumer credit in the U.S. rose to $880 billion (as of August) from about $875 billion at the end of second quarter. ^[4] AmEx expects an increase of around 4-5% in loans during the third quarter. ^[5] AmEx’s effort to reduce loan losses to likely defaulters by reducing credit limits has been successful. The company expects  a historically low default rate and delinquency rate, which at around 1% is already below the U.S. credit card industry average of 2.25%. ^[6]

International Growth To Continue, FX Headwinds A Concern

In a deviation from its closed loop network, AmEx is expanding its customer and merchant base outside of the U.S. through the third party model, whereby it partners with financial services institutes via Global Network and Merchant Services (GNS). These institutions in turn issue AmEx branded cards to consumers and also act as acquirer banks to merchants. At the end of the second quarter, the company had nearly 42 million cards in force issued through GNS, in comparison to around 15 million total AmEx issued cards-in-force outside of the U.S.

China and Japan were major growth drivers in the second quarter, resulting in a 10% growth in card billed business and an 8% increase in cards. FX headwinds partially offset that growth. ^[2] We expect FX headwinds to impact growth in the third quarter as well, given the strengthening of the U.S. dollar against the Japanese yen during the period. ^[7]

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1. American Express Plans Live Audio Webcast of the Third Quarter 2014 Earnings Conference Call, American Express Release [↩]
2. SEC 8-K Filing [↩] [↩]
3. Surveys of Consumers , Thomson-Reuters and University of Michigan, September Release [↩]
4. Federal Reserve Consumer Credit Report, October Release [↩]
5. Credit-Card Issuers Are Charging Higher, Wall Street Journal [↩]
6. Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks, Federal Reserve [↩]
7. Google Finance Currency Charts [↩]