Morningstar | American Express Continues Its Impressive Growth in 2Q
Wide-moat-rated American Express finished its second quarter in line with our expectations. Revenue net of interest expense grew by 9% from the previous year, while diluted earnings per share grew by 25% during the same time period. The two biggest contributors to the company’s improvement over the last year were discount revenue growing by $451 million, or approximately 8%, and net interest income expanding by nearly $300 million. The company’s growth push is evident as card member receivables and loans grew 10% and 14%, respectively, year over year. In the past few years, Amex has endured considerable competition from JPMorgan Chase and Capital One, both of which have experienced moderating growth recently. It appears that in an effort to regain share, American Express has put its foot on the accelerator. We’ll be maintaining our fair value estimate at $112 per share, but we wonder what impact Amex’s recent growth will have on margins.We believe American Express’ recent growth is coming later in the cycle when margins on credit cards are likely materially lower. During the second quarter, Amex saw net charge-offs on loans of 2.5%, a 40-basis-point jump from the previous year, while delinquencies increased 10 basis points to 1.3%. It certainly appears that the company’s growth is putting upward pressure on provisions. In addition, rewards expense jumped by 11% over the past 12 months and card member services expenses, which include things like airport lounges, increased by 22%. If American Express is to maintain its current growth, it will have to maintain its current spending to retain cardholders. We do agree with management that airport lounge access will be difficult to replicate. In addition, unlike the upfront sign-up bonuses that Amex’s competitors offer, things like airport lounge access require greater loyalty and discourage the consumer practice of jumping from one credit card sign-up bonus to the next.
American Express is a payments company. The company is engaged in providing credit and charge cards to consumers, small businesses, mid-sized companies and corporations. The company's reportable operating segments are: Global Consumer Services Group, which provides services to consumers, including travel and lifestyle services; Global Commercial Services, which provides payment and expense management services, as weel as commercial financing products; and Global Merchant and Network Services, which operates a global payments network that processes and settles card transactions, acquires merchants and provides multi-channel marketing programs and capabilities, and services and data analytics.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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