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In the first full quarter since American Express (NYSE: AXP) offloaded its Costco credit card portfolio, the company beat expectations on the bottom line and raised its guidance for 2017. Shares of the credit card company are up 10% since it reported earnings last week.
American Express earned $1.14 billion in the three months ended Sept. 30, down from $1.27 billion in the year-ago quarter. On an earnings-per-share basis, it earned $1.20 compared to $1.24 in the same quarter last year.
While it's normally bad news when a company's earnings per share to decline, investors were clearly relieved to learn that they hadn't dropped as far as analysts expected. The consensus forecast for American Express' earnings per share was $0.97. That was well below its actual results, and even further below the $1.24 per share that it earned if you back out restructuring charges related to the sale of its Costco credit card portfolio to Citigroup.
On top of this, as CEO Kenneth Chenault noted in prepared comments, American Express exceeded its own previously issued 2016 outlook. "Strong operating discipline and credit quality helped to keep us ahead of the 2016 financial outlook that we first provided at the beginning of the year," said Chenault.
American Express' earnings were fueled by higher fees and member spending. Excluding the impact of the Costco deal, revenue grew by 5% in the quarter.
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The company also saw expenses decline by 3% from the year-ago period, settling at $5.5 billion compared to $5.7 billion. The amount of rewards that American Express pays out fell in the absence of its Costco portfolio, though some of the decline was offset by higher marketing and technology expenses.
Chenault pointed to a number of priorities that American Express is focusing on an effort to make up for the loss of its cobranded relationship with Costco.
- It has renewed its emphasis on its platinum card portfolio.
- It is launching new marketing campaigns.
- It is focusing on driving down core operating costs.
- It's pursuing digital channels to grow its customer base.
In light of these initiatives, and its better-than-expected performance in the third quarter, American Express raised its guidance for the full-year 2016 results. It now expects to earn between $5.90 and $6.00 in adjusted earnings per share compared to its previously guided range of $5.40 to $5.70 per share.
"The year-to-date progress gives us greater confidence to substantially increase our investment spending during the remainder of the year and, at the same time, raise our 2016 earnings guidance," said Chenault. "While there's more work and more challenges ahead, the investments we're making are designed to position us for profitable, sustainable growth over the longer term, and we remain on track to earn at least $5.60 per share in 2017."
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John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool recommends American Express. 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.