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EARNINGS PREVIEW: Sluggish Consumer Sentiment, Litigation to Weigh on Card Networks

By Andrew R. Johnson TAKING THE PULSE: Global economic concerns are catching up with the world's largest card-payments networks, dragging their share prices and weighing on upcoming quarterly results. As big bank stocks foundered last year amid weak loan demand, sluggish investment banking revenue and other factors, investors plowed into Visa Inc. (V), MasterCard Inc. (MA) and American Express Co. (AXP), which are shielded from those issues and are benefiting from consumers' shift to electronic payments from cash and checks. But now weak employment figures, waning consumer confidence and economic pressure abroad are threatening their status as safe havens. Visa and American Express recently said growth in card spending had slowed in April and May, with Visa blaming new regulations in part. Visa and MasterCard have risen more than 20% and 13%, respectively, this year, though they are each down more than 1% so far this month. American Express, which is up more than 21% this year, is also down more than 1% this month. UBS downgraded Visa and MasterCard to sell this week, citing their "exposure to a weakening global consumer spending backdrop, which makes a slowdown in key metrics inevitable over the next" three to six months. Regulation and litigation also are on investors' minds. Visa and MasterCard are nearing a settlement of longstanding lawsuits brought by merchants over credit-card fees they pay to banks on each transaction, according to analysts, which expect a deal would cost $6 billion to $12 billion and lead to a temporary reduction in those fees, among other changes. COMPANIES TO WATCH American Express (AXP) - Reports July 18 Wall Street Expectations: Analysts surveyed by Thomson Reuters expect earnings per share of $1.09 on revenue, net of interest expense, of $8.08 billion. A year ago it earned $1.07 a share on $7.62 billion in revenue. Key issues: As a lender primarily to affluent customers, the company's delinquency and loan-loss rates have been among the lowest in the industry. Citigroup Inc. analyst Don Fandetti expects net charge-offs to "remain relatively stable during the rest of 2012," but noted investors worry "about the sustainability of affluent" spending given a slowdown in spending numbers for April and May. Billed business, or the amount of spending on Amex cards, increased between 9% and 10% globally in those two months, down from 15% growth in the second quarter of last year. Marketing and promotion costs, which had been at elevated levels in past quarters, are expected to fall in the second quarter. Analysts also will look for updates on American Express's efforts to expand its new technology offerings, including Serve, a PayPal competitor it released last year in an effort to broaden its customer base and capture a bigger share of online spending. Visa (V) - Reports July 25 Wall Street Expectations: Analysts expect earnings of $1.45 a share on $2.52 billion in revenue. A year earlier it earned $1.26 a share on $2.32 billion in revenue. Key Issues: Last month Visa President John Partridge said strong credit-card spending was helping offset declines in debit volume, which has been hit by new restrictions on how Visa and its competitors can process transactions. Investors will be focused on whether that is still the case in light of a recent report from payment processor First Data Corp. showing credit-card spending overall at retailers increased 4.8% in June, down from an increase of 8.2% in May. With a September trial date approaching in merchant litigation over credit-card fees, investors are also looking for new details about a potential settlement. The suits name Visa, MasterCard and numerous large banks that issue their cards, accusing them of conspiring over merchant fees. Visa, which is responsible for about 67% of a settlement under a sharing agreement reached last year with MasterCard, is largely shielded from a financial standpoint because of a plan set up as part of its initial public offering in 2008 establishing an escrow for the litigation. It has about $4.28 billion in that escrow, which is funded by a separate class of shares held exclusively by U.S. banks that issue Visa cards. Visa also faces a probe by the U.S. Justice Department into pricing changes it made in response to the new debit-card regulations. The changes were meant to reward merchants who continue routing transactions over Visa's network, given the rules allow retailers more ability to route over competing networks as a way to lower their costs. MasterCard (MA) - Reports Aug. 1 Wall Street Expectations: Analysts expect earnings of $5.58 a share on $1.88 billion in revenue. A year ago it earned $4.76 a share on $1.67 billion in revenue. Key Issues: MasterCard is perceived to have more financial risk in a potential settlement of the merchant litigation than Visa. While Visa-issuing banks are responsible for Visa's portion of a settlement, MasterCard is directly responsible for 12% of a settlement amount and its banks are on the hook for another 21%. MasterCard has accrued $770 million for its portion of a potential settlement. MasterCard is also exposed to economic issues in Europe. Recent business wins in Italy and Ireland have helped uphold transaction volumes in Europe, Chief Executive Officer Ajay Banga said in May, though he noted the company was "very carefully" monitoring for signs of weakening consumer spending, which usually lags a decline in consumer sentiment by a few quarters in Europe. In the U.S., the company has benefited from the new debit-card rules, which require banks to include multiple processing options on their cards. -Write to Andrew R. Johnson at [email protected]

Stock News for American Express (AXP)
02/23/201716:01:10Statement of Changes in Beneficial Ownership (4)
02/17/201711:51:33Notice of Iran-related Disclosure Filed Pursuant to Section 13(r)(3...
02/17/201711:48:30Annual Report (10-k)
02/16/201709:30:00U.S. Small & Medium Enterprises Optimistic about Bus. Prospects...
02/15/201712:05:36Current Report Filing (8-k)
02/14/201710:44:00American Express Executive to Participate in KBW Cards, Payments...
02/09/201706:06:44Statement of Ownership (sc 13g)
02/07/201717:17:47Statement of Changes in Beneficial Ownership (4)
01/31/201717:40:05Statement of Changes in Beneficial Ownership (4)
01/31/201717:37:11Statement of Changes in Beneficial Ownership (4)
01/31/201717:35:22Statement of Changes in Beneficial Ownership (4)
01/31/201717:34:22Statement of Changes in Beneficial Ownership (4)
01/31/201717:32:37Statement of Changes in Beneficial Ownership (4)
01/31/201717:31:31Statement of Changes in Beneficial Ownership (4)
01/31/201717:29:30Statement of Changes in Beneficial Ownership (4)
01/31/201717:27:15Statement of Changes in Beneficial Ownership (4)
01/31/201717:26:51Statement of Changes in Beneficial Ownership (4)
01/31/201717:24:18Statement of Changes in Beneficial Ownership (4)
01/31/201717:22:10Statement of Changes in Beneficial Ownership (4)
01/31/201717:19:55Statement of Changes in Beneficial Ownership (4)

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