NEW YORK (CNNfn) - American Express Co., the world's largest single issuer of credit cards, reported first-quarter profit Monday that exceeded Wall Street's predictions, aided by strong revenue growth in its travel services and financial advising units. It also reported a surge in new cardholders, reflecting the popularity of its new Blue Card chip-embedded credit cards.|
The New York-based financial services company earned $656 million, or $1.44 a diluted share, in the first quarter, up 14 percent from the $575 million, or $1.26 a share, a year earlier. The per-share results were 2 cents above the average forecast of analysts compiled by earnings tracker First Call.
Revenue rose 16 percent to $5.3 billion from $4.5 billion.
"These were clearly great numbers, but the real story was the heavy account growth," said Bradley Berning, a senior research analyst in the financial services unit of U.S. Bancorp Piper Jaffray. "Clearly what they intended to do was attract more users, and it appears they've been successful."
The company added 5 million cards in the past year, ending the quarter with 47.9 million cards in circulation.
Investors agreed Monday, sending shares of American Express (AXP: Research, Estimates) up 6-5/8, or almost 5 percent, to 149-5/8. American Express is one of the 30 stocks that comprise the Dow Jones industrial average, which also moved higher Monday.
Benefiting from the economy
The 150-year-old firm joins the ranks of other banks and financial institutions that have benefited from the U.S. economy's strength in recent years, particularly robust consumer spending and the American penchant to put it on plastic, reflected in the nation's record-low savings rate. Savings slipped to an all-time low of 0.8 percent of income in February, according to figures compiled by the U.S. Commerce Department.
In particular, American Express gained customers in the first quarter with the launch of its Blue Card, a credit card with a computer chip embedded in it geared toward younger users. The card, which carries no annual fee, offers a competitive interest rate and allows holders to carry a balance, guarantees the security of e-commerce purchases.
Whether individuals who signed up for the card to take advantage of the introductory six-month zero percent interest rate remain American Express customers will be one of the crucial things to watch for in subsequent quarters, Berning said. The card switches to a 9.9 percent annual interest rate after six months.
At the same time, because American Express's margins are wider than those of other commercial banks offering the same type of incentives to cardholders, their chances of adding more to their bottom line, net interest margin, in analyst-speak, is greater than their competitors, he said. Berning currently has a "buy" rating on American Express shares and a target price of $160 by year's end.
Travel services hit record
Much of the company's profit gain came from strong sales of its travel-related services, such as vacation packages, and other programs that allow its card members to pay for their holidays and travel-related expenses over time, rather than paying the balance in full each month. Earnings at the unit were bolstered by an 18 percent increase in revenue as the company took in more fees and issued more cards.
In its financial advice operation, which sells investment products and offers financial advice for card members, the company posted record earnings of $245 million, up 15 percent from $214 million a year earlier. Stock market gains and sales of investment accounts including mutual funds helped the company collect more fees on the assets it manages for its customers.
Michael Hughes, a banking analyst with Merrill Lynch in San Francisco, said ensuring the company's customer base continues to grow will be crucial for its subsequent quarters -- not only in its credit card unit but also among its other businesses, including travel and investment services. He currently has an "accumulate" rating on the stock and a year-end target price of $172.
While the number of Visa and MasterCard credit cards in circulation dwarfs the number of American Express cards, American Express does not distribute its cards through commercial banks, making it the biggest issuer of cards in the world.