American Express Company (AXP) Q4 Earnings Preview

American Express Company (AXP) Q4 Earnings Preview
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American Express Company (NYSE:AXP) will report its fourth quarter earnings after the bell on Thursday, and during the week there’s been an array of research reports previewing it.

American Express Company (AXP) Q4 Earnings Preview

On Tuesday, The Buckingham Research Group put together what they called, “Solid Balance Growth Continued in December; Credit Trends Stable.”

The firm maintained its “Buy” rating after the release of December’s credit and loan balance data for American Express Company (NYSE:AXP)’s U.S. consumer and its small business credit card business. Analysts have a $69 target price on the stock.

Here are some highlights:

  • American Express Company (NYSE:AXP) reported chargeoffs and delinquencies for its US Card Services (USCS) unit for December. It reported a managed Q4 chargeoff rate of 2% when it preannounced its Q4 results last week.
  • In December, managed chargeoffs and delinquencies in USCS rose slightly (dollars) from November, but both remain near all-time lows and neither looks likely to rise soon.
  •  Chargeoffs remain extremely low. USCS managed a chargeoff rate of 2.1% in December, up slightly from November’s 2.0% and a year ago’s 2.3%. Dollar chargeoffs increased from $89 million in November to about $96 million in December – still very low.
  • 30+ day USCS managed a delinquency rate unchanged at 1.2%. Although delinquent loans in dollars rose from about $640 million in November to $670 million in December, they remain well below $750 million reported a year ago and don’t seem likely to rise much other than as a result of seasonality.
  • Loan growth solid in Q4. USCS managed loans increased by $3.1 billion in Q4, with a $2.4 billion (4.5%) increase during the month of December. With 4.3% yr/yr growth of card lending balances, Amex continues to grow faster than the industry’s 1% growth rate.
  • Trust delinquency and chargeoff rates are lower. Trust 30+ day delinquency rate declined by 9bp to 1.27% (or $5 million lower to about $410 million) in December and reached new historic lows.
  • 31-60 day delinquency rate declined by 3bp to 0.38%, 61-90 day rate was unchanged at 0.28% while 90+days delinquency rate declined by 7bp to 0.61%.
  • Trust net chargeoff rate declined by 9bp to 2.08%, despite a 10bp decline in recoveries.
  • Payment rate at 30.82%, though 33bp are lower, it  remains still an industry high and an indication of low delinquencies and chargeoffs.

Valuation/Investment thesis

  • Analysts’ $69 price target implies a P/E ratio of about 14x estimated 2013 EPS, consistent with historical P/Es.
  • Amex’s card network, superior lending business, and its ability to achieve its long term goals (8%+ revenue growth, and 25% ROE growth, 12%-15% EPS growth) justify a higher valuation.
  • Analysts see the latest reengineering initiative to yield the anticipated expense savings and help support revenue and earnings growth.

In addition, this week JPMorgan Chase & Co. (NYSE:JPM) cut its American Express rating from “Neutral” to “Underweight.” The firm has a $60.00 price target for the stock.

Additional reports this week included the following:

  • Goldman Sachs Group, Inc. (NYSE:GS) downgraded American Express from a “Buy” rating to “Neutral” with a $65.00 price target. The move came from a valuation call.
  • Credit Suisse Group AG (NYSE:CS) reiterated its “Underperform” rating with a $59.00 price target, up from its previous $58.00.
  • Barclays PLC (LON:BARC) (NYSE:BCS) Capital  reiterated its “Overweight” rating with a $68.00 price target.

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