American Express Earnings Jump, but Further Costco Fallout Lies Ahead

By Markets Fool.com


Catering to vacationers is part of American Express' core business. Image: American Express.

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For many people, American Express epitomizes the payment-card industry, with its pioneering AmEx card having played a pivotal role in the evolution of how people pay for things over time. Yet most of the news about American Express has been negative recently, as the company wrestles with the impending loss of a major relationship with retail giant Costco , and the impact of the strong U.S. dollar on revenue from its vast overseas operations.

Investors wanted to see signs of stability in Thursday afternoon's first-quarter financial report, and solid earnings growth largely delivered a solid bill of health for the financial company. Yet even as American Express plans for next year and beyond, shareholders aren't certain whether the company will recover from its latest downturn in its future prospects. Let's look more closely at the American Express report, and what it says about the card company's current condition.

American Express blames currency woes for falling sales
American Express posted mixed figures for the first quarter, with profits climbing despite a drop in sales. Overall, revenue fell 3% from year-ago levels, with AmEx blaming "the significant impact of a stronger U.S. dollar on international operations" for the decline.

The company noted that, on an adjusted basis that excludes its former business travel operations, revenue gained 5% in constant-currency terms, with stronger spending trends among its cardholders and a rise in net interest income helping to drive the gains. On the earnings front, net income rose 6%, sending earnings to $1.48 per share, up 11% from last year, and beating consensus expectations by more than $0.10 per share.

A focus on its various divisions shows how American Express had to navigate tough waters during the quarter. Net income for the U.S. Card Services division rose 7%, with higher spending largely accounting for the increase. Provisions for losses were down 13% from the year-ago quarter, suggesting that the consumers who AmEx targets for its cards are still in good financial shape, and pose little threat of default or other adverse results for the company.

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But the various global and international businesses under the American Express umbrella fared less well, with the International Card Services unit taking the biggest hit, with a 16% drop in net income. Global Commercial Services income was down about 2%, while Global Network and Merchant Services posted flat income compared to last year's figures.


Image: American Express.

Overall, American Express seemed satisfied with the results, especially in light of changing conditions. As CEO Kenneth Chenault put it, the report "showed solid core performance and continued progress in expanding the American Express franchise despite an impact from several of the headwinds we're confronting." Although Chenault was pleased with higher spending levels, a rise in loans, and solid credit-quality metrics, he also pointed out the need to overcome factors like the sluggishness in the global economy, as well as company-specific issues like renegotiating cobranded card relationships.

What will the future bring for American Express?
In particular, the coming end of American Express' relationship with Costco will be a key event. In guiding for the full 2015 year, the company expects flat to slightly lower earnings this year compared to 2014, specifically citing some of the investments that American Express has had to make in order to make up for the impact of losing Costco next year. Already, Costco Canada has ended its co-branding arrangement with American Express, and that already had an impact on the company's results.

Mobile payments are a growth opportunity for AmEx. Image: American Express.

Still, American Express is taking steps of its own to counter the downward impact of losing Costco. With its new Plenti loyalty coalition business, American Express hopes to build a rewards program that encourages cardholders to do business with small merchants. By doing so, American Express hopes to destroy the impression that it takes advantage of its smaller customers with higher charges than some of its rivals might impose. Overall, Chenault believes that "we have a range of growth opportunities across the business and continue to be very positive about the moderate- to long-term outlook for our company."

For traders, the immediate effect of American Express' miss on the revenue front was a drop in the share price, with the stock falling more than 1% in the first 45 minutes of after-hours trading following the announcement. Yet even though the stock might see further short-term pressure to add to shareholders' recent woes following the initial announcement of the Costco decision, American Express still has huge brand awareness across the globe that it can use to develop its business.

Given enough time, American Express has the capacity to become, once again, a global financial force -- as long as it can put the Costco episode behind it and move forward with aggressive growth.

The article American Express Earnings Jump, but Further Costco Fallout Lies Ahead originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends American Express and Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.