Monday, January 24, 2011

American Express Co. (NYSE: AXP): Q4 Earnings Preview 2010

American Express Company (NYSE: AXP) is scheduled to release its fourth-quarter financial results after the closing bell on Monday, January 24, 2011. Analysts, on average, expect the company to report earnings of 95 cents per share on revenue of $7.33 billion. In the year ago quarter, the company reported earnings of 59 cents per share on revenue of $6.49 billion.

American Express Company provides charge and credit payment card products, and travel-related services worldwide. Its principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses. It operates in two groups, the Global Consumer Group and the Global Business-to-Business Group. It issues both charge cards requiring a monthly payoff and credit cards on which customers can carry a balance.

American Express attracts more affluent card-holders on average than its peers due to its ability to cater to these customers better with benefits and rewards packages. Its other distinguishing factor is that it charges no fees on balances that are paid off within a certain grace period. As a result, American Express enjoys some of the lowest charge off rates in the industry.

In the preceding third quarter, the New York-based company's net income was $1.1 billion, or 90 cents a share, compared to $640 million, or 53 cents a share, in the prior-year quarter. Revenue, net of interest expense, rose 17% to $7.0 billion. Analysts, on average, expected the company to report earnings of 85 cents per share on revenue of $6.79 billion. The significant surge in earnings for American Express was attributable to an increased usage of cards with lesser defaults as consumers resumed their spending at a level similar to the pre-recession period.

American Express has pulled itself out of the recession more quickly than its rivals, owing to its creditworthy customers. Moreover, less reliance on revolving credit and back-end fees has helped gain competitive advantage for the company while also improving its overall risk profile. Besides, there has been an impressive recovery in credit trends, with increased card spending over the last few quarters.

However, challenging regulatory economy and the impact of new regulations on the card industry still remain concerns. The new regulations under the CARD Act of 2009 are expected to make American Express’ credit cards costlier and will in turn result in lower interest income and loan fee income.

Recently, American Express (NYSE: AXP) said that it will recognize fourth quarter restructuring and other reengineering charges of $113 million ($74 million after-tax, or $.06 per share). The charges primarily reflect severance-related payments associated with a decision to consolidate locations within the Company's global servicing network. After recognizing the fourth quarter charges, American Express expects to report quarterly net income of $1.1 billion, or $.88 per common share. This would represent an increase of 48 percent from $716 million, or $.60 per share, a year ago. Excluding the charges, fourth quarter adjusted earnings per share is expected to be $.94 per share. 
"Strong growth across all business segments helped raise fourth quarter and 2010 cardmember spending to record levels." said Kenneth I. Chenault, chairman and chief executive officer."Despite an uneven economic environment, credit quality trends also continued to improve with key indicators for the quarter now back to -- or better than -- historical levels. This improved credit quality translated into lower provision expenses for the quarter. In addition to generating strong earnings growth, the underlying performance during the quarter provided an opportunity to continue to make significant investments in business-building initiatives. The ability to capitalize on market opportunities and generate additional Cardmember spending has positioned us well for the next phase of the economic recovery," Chenault added.

As part of the consolidation, a facility in Greensboro, North Carolina, will be closed; work currently handled there will be transferred to other locations in the U.S. Subject to local consultations or feasibility studies, the company also plans to transfer work currently handled at a Madrid, Spain, service center to facilities in Brighton, U.K., and Buenos Aires, Argentina, and service support for the Japanese card business from Sydney, Australia to Japan.

The overall reengineering initiatives are expected to generate additional charges in 2011 of $60 to $80 million ($38 to $51 million after- tax). Those charges would reflect costs associated with future closings of the real estate facilities and additional employee compensation during the transition period. The consolidations, along with the reengineering initiatives reflected in the charges, are expected to deliver annualized savings of approximately $70 million, starting in 2012. A portion of those savings are expected to be reinvested into new servicing capabilities and other business building initiatives. Overall staffing levels are expected to decline by about 550 positions, net. However, because the reengineering initiatives involve relocating work to different locations, approximately 3,500 existing positions would be impacted. The consolidations are not expected to be substantially completed until year end 2011 in order to help affected employees make the transition and to ensure the continuation of uninterrupted customer service.

The company said that its decision reflects an overall decline in service volumes as more and more routine transactions have migrated to online and mobile channels. Staffing levels have declined to reflect those lower volumes, largely by not filling positions that opened up when employees leave. The reduced staffing levels have created significant vacancy levels in some facilities and, as a result, real-estate-related costs are inconsistent with anticipated needs.

In terms of stock performance, AXP shares have gained nearly 10 percent over the past year.

Full Disclosure: None.
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