American Express (AXP, Financial) received a huge vote of confidence from investors after the company reported its third-quarter earnings results on Oct. 19. It blew past Wall Street estimates, reporting adjusted earnings of $1.20 on the back of $7.77 billion in revenues. The market was expecting it to come up with earnings of 97 cents per share with revenues of $7.7 billion.
The market got more than it expected, but American Express came out with a solid operating performance by reducing expenses as well. At the end of the fourth quarter of last fiscal American Express reported a mind-boggling 38% drop in profits, which led to some amount of soul searching within the company. At the time CEO Kenneth Chenault promised investors that he would improve things from within, starting with a plan to cut $1 billion in costs by 2017.
Consolidated expenses have been coming down steadily through the year. During the third quarter, consolidated expenses stood at $5.5 billion, down 3% compared to the prior period; in the second quarter it was $4.8 billion, down 15% compared to the prior period.
Apart from reducing the cost footprint, American Express said that underlying revenue growth improved by 5% when excluding the impact of Costco’s (COST, Financial) business.
“While reported revenues were down 5%, we saw underlying revenue growth of 5% after adjusting for the absence of Costco-related business this quarter – slightly faster than comparable second-quarter levels.” – Kenneth I. Chenault, chairman and chief executive officer
As underlying growth returned to the company, American Express revised its outlook for the year, increasing the prior estimate of adjusted full-year earnings per share from the range of $5.40 to $5.70 to an adjusted earnings range of $5.90 to $6.00, which excludes restructuring charges. American Express reiterated its goal to earn at least $5.60 in 2017.
That American Express was able to revise its bottom line outlook for the year while holding on to its numbers for the next year was more than enough news for the market to push the stock by more than 10% after the results came out.
Clearly, American Express has been able to fix a lot of things internally and improve its operating results, but it still remains to be seen when and how it will get its top line back on track. All its competitors, especially Visa (V, Financial) and PayPal (PYPL, Financial), are growing their revenues at a solid pace, and American Express cannot let its own trend continue for long and expect that not to damage the company’s long-term prospects.
The sooner the company returns to top line growth the better it will be. Sometimes, confidence is all that a company needs, and the third quarter has turned out in a way that will allow the company to take some risks and try harder to improve its sales.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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