Credit card heavyweight and Dow-30 component American Express (AXP - Free American Express Stock Report) recently released mediocre financial results for the first quarter. Share earnings were $1.15, $0.08 higher than 2012's like period but a nickel lower than our call. The miss mostly stemmed from lower-than-expected total revenues and a higher-than-anticipated tax rate; revenues were $7.9 billion, compared with our $8.2 billion estimate, and the tax rate was 250 basis points higher than our call. After the earnings release, shares of Amex were off slightly in after-market trading.
Overall, although slightly disappointing, Amex's quarterly performance was decent. Cardmember spending continued to increase (up 6%, year over year) and the company experienced greater net interest income, thanks to the expansion of its loan portfolio. The consolidated provision for loan losses totaled $497 million, up 21%. That said, the sharp increase reflected higher reserve releases. At this time, in our view, the provision for loan losses is at a very manageable level, which can be attributed to American Express' affluent customer base.
Looking ahead, we continue to like American Express' prospects. Although there are still economic concerns, both at home and abroad, we anticipate that cardmember spending will continue to increase at a healthy rate over the next several years. Furthermore, Amex's customers generally possess good credit scores, so loan losses should remain in check. Continued, gradual improvements in the U.S. housing and job markets would also benefit the company's top and bottom lines.
For 2013, we are lowering our share-earnings estimate to $4.80, from $4.85, which reflects the first-quarter shortfall. However, this would still represent a healthy year-over-year gain of 9%. Looking to next year, we are introducing a share-net call of $5.30, 10% higher than our 2013 estimate. Further out, we project that earnings will exceed $6.50 a share by the 2016-2018 time frame.
As for the stock, although it is up 12% year to date, we think that Amex is a bit undervalued. It is currently trading at just above 13 times our 2013 share-net estimate, which is lower than its historical average and the multiple we project to 2016-2018. All told, we continue to believe that shares of American Express would make a fine addition to most equity portfolios, particularly those with a conservative, long-term approach.
About The Company: Established in 1850, American Express Company has grown to become a leading global payments, network, and travel firm. It operates through multiple business segments, including the Global Consumer Group and Global Business-to-Business Group. The company sold its AMEX Life business in October of 1995 and its American Express Bank in February of 2008. In mid-1994, it spun off Lehman Brothers to shareholders and ten years later, did the same with American Express Financial Advisors.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.