AmEx (AXP) Q4 Earnings To Be Thwarted By Tax Reform Charge

American Express Co.’s (NYSE:AXP) fourth-quarter earnings should see a drag from the recent corporate tax reform, which has been slashed to 21% from 35%. Consequently, the company would see nearly $2.4 billion charges in the to-be-reported quarter on account of write-down in deferred tax assets (DTAs) and a one-time tax on the company’s unrepatriated overseas earnings.

This one-time charge will push American Express to a loss in the fourth quarter. Moreover, the company expects 2017 earnings to fall short of its guided range of $5.80-$5.90 per share.

Q4 Earnings Drivers

Increase in Net Revenues: We expect the company’s fourth-quarter revenues net of interest expense to increase on the back of strong growth in billed business and an increase in net interest income. Net interest yield is expected to increase year over year primarily related to a shift in mix toward non-cobrand lending products that generally attract more revolving loan balances, a lower percentage of total loans at introductory interest rates, specific pricing actions and a benefit from increases in benchmark interest rates.

The Zacks Consensus Estimate for total revenues net of interest expense is $8.8 billion, up from $8.4 billion reported in the previous quarter.

Higher Total Cards in Force: Total cards in force represent the total number of charge and credit cards that are issued and outstanding, and accepted on the company’s network. The Zacks Consensus Estimate for total cards in force is 115 million, up 4.5% year over year.

Increase in Card Member Loan: Card Member loan and receivables growth is expected to be strong year over year, as the company continues to expand its relationships with existing customers and acquire new Card Members.

Share Buyback: In addition, its strong balance sheet position should let it continue returning a significant amount of capital to shareholders through share repurchases, which will aid its bottom line.

Partial Dampeners to Earnings Growth

Higher Provision for Loss: Provisions for losses are expected to increase as a result of higher Card Member loans and receivables, expected increases in delinquencies and net write-off rates. The increase in delinquency and net write-off rates might primarily be due to the seasoning of recent loan vintages and a shift in mix toward non-cobrand lending products, which have higher write-off rates.

These trends should lead provisions for losses to continue to grow faster than loans. Per the Zacks Consensus Estimate, provisions for losses are expected to be $521 million, up 29% year over year.

Increase in Card Member Spending: Spending on Card Member engagement (the aggregate of rewards, Card Member services and marketing and promotion expenses) should increase due to the recent enhancements to rewards on its U.S. Platinum products, continued strong growth in its Delta cobrand portfolio and higher levels of engagement in many of its premium services.

Earnings Surprise History

The company boasts an attractive earnings surprise history, having surpassed the Zacks Consensus Estimate in three of trailing four quarters, with an average beat of 0.07%.

What Our Quantitative Model Predicts:

Our proven model does not conclusively show that American Express is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1, 2 or 3 for this to happen. But that is not the case here as you will see below.

Zacks ESP: American Express has an Earning ESP of -0.32%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: American Express carries a Zacks Rank #1 (Strong Buy), which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise. The company’s negative ESP thus leaves the case inconclusive.

We caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a few companies with the right combination of elements to deliver an earnings beat this quarter:

Houlihan Lokey, Inc. (NYSE:HLI) is expected to report fourth-quarter earnings performance on Feb 7. The company has an Earnings ESP of +12.73% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CIT Group Inc. (NYSE:CIT) has an Earnings ESP of +3.66% and a Zacks Rank #2 (Buy). The company is expected to release fourth-quarter earnings results on Jan 30.

Blackhawk Network Holdings, Inc. (NASDAQ:HAWK) has an Earnings ESP of +1.37% and a Zacks Rank #2. The company is expected to announce fourth-quarter earnings results on Feb 21.

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