We are downgrading our recommendation on American Express Company (AXP: 40.20 +1.31 +3.37%) to Neutral from Outperform as we expect the overall economic recovery to be sluggish and hence AmEx's top line growth will face obstacles in the near term.
AmEx's fourth quarter earnings from continuing operations of 59 cents per share were ahead of the Zacks Consensus Estimate of 56 cents, driven primarily by lower provision for credit losses, increased cardmember spending and stable expenses as a result of its re-engineering efforts.
Also, credit trends are now showing signs of improvement. However, decreased revenue, a lower return on average equity (ROE) and miserable real estate values as a result of higher unemployment were downsides.
Beyond the basic cost cutting, AmEx has implemented a major re-engineering program to increase efficiency and reduce activities that do not support its highest preference. As part of the re-engineering effort, during 2009, AmEx recorded restructuring charges of $185 million compared to $434 million in 2008, $49 million in 2007 and $100 million in 2006.
The restructuring activity was primarily related to rightsizing certain operations and eliminating headcount to control its cost structure. During 2009, AmEx reduced its global workforce by approximately 6%. We expect these efforts to help support the bottom-line significantly. Also, reinvestment of cost savings into revenue growth initiatives could help drive superior long-term returns.
AmEx has the ability to increase market penetration, merchant acceptance and brand recognition as it is expanding its list of network partners. The Global Network Services business is doing very well, with spending on cards growing at a compound annual rate of 25% since 1999. We expect the spending to rise with more network partners.
However, revenue growth is likely to be restricted as a result of softness in billed business. Discount revenue � which represents fees charged to merchants when members use their cards to purchase goods and services on the AmEx network � is primarily driven by billed business volumes and is one of its largest single sources of revenue.
In recent years, AmEx has been under market pressure to reduce merchant discount rates and undertake other re-pricing initiatives as a result of regulatory pressure and non-U.S. competition. However, we noticed improvements in billed business trends in all business lines during the fourth quarter of 2009.
AmEx maintains substantial operations outside the U.S. During 2009, the company generated about 33% of its total revenues from its non-U.S. activities. Therefore, currency fluctuations relative to the U.S. dollar and foreign exchange controls could affect commercial lending activities and decrease revenue from international operations.
AmEx's fourth quarter earnings from continuing operations of 59 cents per share were ahead of the Zacks Consensus Estimate of 56 cents, driven primarily by lower provision for credit losses, increased cardmember spending and stable expenses as a result of its re-engineering efforts.
Also, credit trends are now showing signs of improvement. However, decreased revenue, a lower return on average equity (ROE) and miserable real estate values as a result of higher unemployment were downsides.
Beyond the basic cost cutting, AmEx has implemented a major re-engineering program to increase efficiency and reduce activities that do not support its highest preference. As part of the re-engineering effort, during 2009, AmEx recorded restructuring charges of $185 million compared to $434 million in 2008, $49 million in 2007 and $100 million in 2006.
The restructuring activity was primarily related to rightsizing certain operations and eliminating headcount to control its cost structure. During 2009, AmEx reduced its global workforce by approximately 6%. We expect these efforts to help support the bottom-line significantly. Also, reinvestment of cost savings into revenue growth initiatives could help drive superior long-term returns.
AmEx has the ability to increase market penetration, merchant acceptance and brand recognition as it is expanding its list of network partners. The Global Network Services business is doing very well, with spending on cards growing at a compound annual rate of 25% since 1999. We expect the spending to rise with more network partners.
However, revenue growth is likely to be restricted as a result of softness in billed business. Discount revenue � which represents fees charged to merchants when members use their cards to purchase goods and services on the AmEx network � is primarily driven by billed business volumes and is one of its largest single sources of revenue.
In recent years, AmEx has been under market pressure to reduce merchant discount rates and undertake other re-pricing initiatives as a result of regulatory pressure and non-U.S. competition. However, we noticed improvements in billed business trends in all business lines during the fourth quarter of 2009.
AmEx maintains substantial operations outside the U.S. During 2009, the company generated about 33% of its total revenues from its non-U.S. activities. Therefore, currency fluctuations relative to the U.S. dollar and foreign exchange controls could affect commercial lending activities and decrease revenue from international operations.
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