American Express (AXP) Q1 Earnings Beat, 2017 View Intact

Shares of American Express Company (NYSE:AXP) rose 2.5% in after-market trading, following the release of its first-quarter 2017 results. Adjusted earnings per share (EPS) of $1.34 beat the Zacks Consensus Estimate of $1.28 but declined 8% year over year.

Better-than-expected results were mainly backed by the company’s investments to grow its business coupled with cost control initiatives.

The company reaffirmed its earlier EPS guidance of $5.60–$5.80 for 2017.

Performance in Detail

Revenues of $7.9 billion came in ahead of the Zacks Consensus Estimate of $7.7 billion. However, revenues were down 2% year over year reflecting lower discount revenue and net interest income following the Costco (NASDAQ:COST) portfolio sale in the second quarter of last year.

Notably, excluding Costco-related business and the effect of foreign exchange rates owing to the impact of a stronger U.S. dollar on international operations during the quarter, adjusted revenues climbed 7% driven by higher adjusted Card Member spending and adjusted net interest income.

American Express acquired 2.6 million new card users globally and “card member spending grew 8%.”

Provisions for losses totaled $573 million, up 32% year over year, reflecting higher loan growth, receivables and net write-offs.

Total expenses of $5.5 billion increased 1% year over year, led by higher rewards’ expenses as the company added new features to its products to woo customers.

Total operating costs during the quarter were down 3% year over year. The company continued to progress on its cost reduction initiatives and is on track to remove $1 billion from cost based on a run rate basis by the end of 2017.

The effective tax rate was 33%, reflecting a decrease from 36% in the year-ago quarter.

Segment Results

American Express’ U.S. Consumer Services segment reported net income of $469 million in first-quarter 2017, plunging 32% year over year. Total revenue, net of interest expenses, declined 8% year over year to $3.3 billion. Notably, the year-ago period included Costco-related revenues, provisions and expenses.

International Consumer and Network Services’ net income amounted to $218 million, up 16% year over year. Total revenue, net of interest expenses, increased 5% year over year to $1.4 billion, primarily driven by higher Card Member spending.

Global Commercial Services’ net income of $418 million plummeted 14% year over year. Total revenue, net of interest expenses, increased 3% year over year to $2.5 billion, primarily reflecting higher Card Member spending. The company, however, expects this to remain a slower growth segment as it has not yet experienced an uptick in travel and entertainment spending by larger corporations.

Global Merchant Services’ net income inched up 2% year over year to $363 million in the reported quarter. Total revenue, net of interest expenses, was down 2% year over year to $1.1 billion. The prior-year quarter included Costco-related revenues.

Corporate and Other reported net loss of $231 million compared with net loss of $298 million in the year-ago quarter.

American Express' return on average common equity (ROCE) was 25.1% as of Mar 31 2017, up 150 basis points year over year.

Our Take

First-quarter results reflect strong performance by the company. Its strength in consumer business and international business should continue to support growth.

Going forward, we expect to see favorable earnings performance from the company given that it will continue with its elevated spending on growth initiatives. Its efforts toward reducing the cost base will further support the bottom line.

American Express carries a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Among the other players in the space that are lined up to report their financial results, below are three that are poised to beat on earnings as per our model.

Western Union Co. (NYSE:WU) will report first-quarter 2017 earnings results on May 2. The company has an Earnings ESP of +2.56% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Discover Financial Services (NYSE:DFS) has an Earnings ESP of +1.41% and a Zacks Rank #3. The company is expected to report first-quarter earnings results on Apr 25.

Moody’s Corporation (NYSE:MCO) has an Earnings ESP of +0.84% and a Zacks Rank #2. The company is expected to report first-quarter earnings results on May 5.

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