Seekingalpha.com
0
All posts from Seekingalpha.com
Seekingalpha.com in Seekingalpha.com,

American Express: CFO Updates Q3 2015 Operations At The Barclays Global Financial Services Conference

American Express CFO Jeff Campbell recently presented at the Barclays Global Financial Services Conference.

During his unique presentation, Campbell updated investors on Q3 2015 operating results.

I continue to be underwhelmed with management, but will reserve a secondary call for management's exit until actual Q3 reporting.

American Express continues to be a laggard and one in which there is no apparent immediate term, company-driven upside to be had.

American Express (NYSE:AXP) is out with a third quarter operations update which was given by Jeff Campbell - American Express' EVP & CFO (full transcript can be found at Sentieo.com - I'm not aware of a free source) - at the recent Barclays Global Financial Services Conference. Campbell, whose company is one of the world's largest payment/payment tech companies, touched on several marquee areas of wonder in what was hosted as a unique fireside chat presentation. Campbell presented without any prepared commentary or deck slides, but was given the results to an analyst poll (which Barclays conducted using analysts in attendance) to which he was asked to react to poll results per question.

I believe the mid-quarter update and subsequent poll result commentary given comes at a very important time for American Express as it comes just after what was a tough reported earnings period in which the company faced several headwinds. Some of these headwinds the company has no control over and will not have control over moving forward - these include a negative FX impact; global GDP concerns; a growing, more volatile global FX environment; growing more fierce competition; etc. These headwinds and how American Express reacts to them grew in importance at the conclusion of Q2 2015 earnings as it was realized that American Express, while not directly comparable to its sizeable peers in Visa (NYSE:V), MasterCard (NYSE:MA), and Discover (NYSE:DFS), was the clear laggard from an operational execution standpoint. Campbell, while not the architect of American Express' next iteration evolution per se, is the man behind American Express' all-important capital allocation and his opinion weighs heavily into the total strategy at the company in general. I believe what he says is hugely important to listen to for multiple reasons.

Campbell updated investors (all quoted excerpts sourced to Sentieo.com):

  • "…for the full-year our 2015 EPS outlook remains unchanged as we continue to expect EPS to be flat to modestly down…we also believe our outlook to return to positive EPS growth in 2016 and within our target range of 12% to 15% in 2017 remains appropriate. And I'd remind you that we've said all along that that outlook does exclude any restructuring charges or other contingencies that might come up…"
  • "…you'll see a continuation of some of the same trends you've seen for some time: very strong credit metrics, really good operating expense control, pretty good loan growth relative to the industry and good use of the balance sheet to buy back shares."
  • "…we'd expect earnings per share in Q3 to be down year over year…I would say that if you look at our billings trends, adjusting for FX on a sequential basis they are likely to be flat to modestly down. In addition I'd say when you look at revenue growth in Q3 it will be down sequentially from Q2…"

Now while there are some positives to be taken here, such as that guidance remains unchanged on a full-year basis, and that forward-looking EPS growth is still expected to be back into the historic 12% to 15% growth range, largely the rest is negative. I understand that American Express has only had a few months to optimize and to make changes since I lambasted the company and management for failure to perform. I fully realize not a long duration has passed and that my expectations should be measured.

However, for the company to come out and essentially soft-warn on EPS even on an FX-adjusted basis is disappointing - regardless of duration. I would have expected the company to find some beacon of stability when faced with what were at the time (at Q2 2015 reporting) deteriorating fuel pricing (which are a headwind to topline) and continuation of a strong dollar (which is also a strong headwind) trends that were well established. These were not moving or highly volatile "chance variables;" these were headwinds with which the company had clear visibility into.

The visibility, unfortunately for American Express equity holders, was that they would get more punitive. Why has the company not been able to react to these? Was there no contingency plan in place for a longer-duration, multi-headwind operating environment? I just don't understand the continued lack of ability to flex a large model around what have been fairly stable headwinds. In addition to this less than impressive news, American Express also stated that this updated guidance, which was largely held over from Q2 2015, was ex. restructuring and other charges as a result of optimization efforts. So, in summary, financials might require the investment community to be even more imaginative with adjustments and backing out of noise come Q3 than they were at Q2. That's not good.

Now, Campbell did remind investors that American Express is deploying additional efforts (read: upticks to expenses on the immediate term) to areas of multi-year but not immediate term value. That these efforts would not be visible right away and would require patience. But even those are still positives that require a particular investment horizon to think positively of, certainly that isn't universally positive for those in this name for a swing trade or for those needing liquidity in the near term. Campbell also noted that the co-brand portfolio is now much less concentrated and that risk within the co-brand portfolio has been fragmented. This is in fact a positive and a big risk management relief but again nothing that provides much of an upside - simply more downside protection:

"…once you get past Delta which we just renewed for the long-term, Starwood which we just renewed for the long-term, you get to a portfolio of over 50 co-brand partners not one of whom is particularly material. And collectively once Costco goes away some time in 2016 you'll see that entire portfolio was only 15% or 16% of our volumes... In the near- to medium-term I would have to say in terms of losing any additional co-brand partner that would have any significant impact on the business I don't really see that as something we worry about at all"

The one upside hope that Campbell did provide the analyst and investor community was that coming from M&A - Campbell alluded that this might be something we hear more about very soon:

"I would say we haven't been acquisitive at all in recent years. I wouldn't say we won't do some acquisitions…In fact, I think you should expect that at some point you would see us do as we have if you go back a few years some acquisitions. But the kinds of things you would see us do would be things like the loyalty partner acquisition in 2011 which was in the grand scheme of our capital structure a pretty modest sized acquisition, about $700 million, and really played off the core strengths of the business and we thought was a really nice addition."

Overall, I was a bit let down by the update, which was completely unexpected by the way, but I'm happy that Campbell and American Express at least keep investors in the loop as often as possible. I've been invested in names (and am currently invested in some names) that don't even bother to do this - it's almost a painful event when they do give updates. That said, American Express needs to do better than this at Q3 reporting and have a much more comprehensive go-forward strategy. I wouldn't have expected that to be laid out in a mid-quarter update, I'm just saying management needs to have one. I've recently called for management's exit, Campbell included in that, in that I think management has dropped the ball and has consistently underperformed. I think that without a comprehensive plan at Q3, the case for new management does nothing but get stronger. Campbell isn't immune to this exit grouping in that he's the man in charge of capital allocation and that allocation hasn't done well to help protect American Express equity pricing.

Hopefully, we aren't disappointed again at next reporting. Good luck everybody.


More