Spending Volume Remains Key For American Express 3Q
17 October 2009 - 5:15AM
Dow Jones News
As American Express Co. (AXP) gets a handle on the credit
quality of its card loans, investors will be looking for trends in
retail spending as the company reports third-quarter results Oct.
22.
The more cardholders charge on their AmEx plastic, the more the
company earns by way of fees; strapped and budget-conscious
borrowers could crimp third-quarter earnings, and if consumers,
heading into the busiest shopping season in the U.S., continue to
hold back, it could even dent AmEx's prospects for the fourth
quarter.
The amount cardholders spend "will be key," said Scott Valentin,
an analyst at FBR Capital Markets.
An AmEx spokeswoman declined to comment, citing the so-called
quiet period ahead of a company's earnings report.
American Express issues charge cards, which must be paid off
each month, as well as credit cards that allow customers to carry a
balance. Unlike most other card companies, which either issue
plastic or process the transactions, AmEx does both. Therefore, a
big chunk of its revenue comes from fees it charges banks and
merchants, such as grocery stores or gas stations, to process card
payments. But as economic woes and unemployment grow, consumer
spending slows, eating into the fees that AmEx earns from
transactions.
American Express customers reduced spending by 16% in the second
quarter, sending the company's quarterly net income down 48%.
But investors concerned about cutbacks in spending may draw some
comfort from improving credit trends on AmEx's card portfolio. This
is also key to the company, as cash-strapped consumers struggle to
keep up with payments. AmEx not only has to write off loans on
souring credit-card debt, but it also has to squirrel away funds to
reserve against potential future losses.
Citing preliminary data, the company said Wednesday that U.S.
borrowers at least a month behind their card payments for the third
quarter totaled 4.1%, down from 4.4% in the second quarter. At the
same time, the company said it wrote off 8.9% of its U.S. card
loans for the quarter ended Sept. 30, down from 10% in the second
quarter.
Analysts polled by Thomson Reuters expect net income of 36 cents
a share on revenue of $5.9 billion for AmEx's third quarter. A year
ago, the company posted earnings of 70 cents a share on revenue of
$7.2 billion. The Thomson Reuters estimate and year-ago net may not
be comparable due to one-time items and other adjustments.
Investors have also taken comfort from the company's repayment
in June of the $3.4 billion in bailout cash it had received from
the government as a sign that the industry is poised for a
recovery.
In addition, American Express last month resumed annual salary
hikes and contributions to retirement plans that it had suspended
earlier this year. This move indicates the company is "saying
things aren't getting markedly worse," says FBR's Valentin.
AmEx shares recently traded at $35.05, down 49 cents, or 1.38%.
The stock has traded in the range of $9.71 to $36.50 in the last 52
weeks.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com