Credit Card Spending Lifts American Express

The company posts an 11% jump in profit and raises its full-year guidance.
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Updated from 4:52 p.m. EDT

American Express

(AXP) - Get Report

said earnings rose 11% in the second quarter, thanks to increased spending on its credit cards, higher lending balances and better market conditions.

The nation's third-largest credit card issuer also expects to beat analysts' estimate of $2.26 a share this year, but said profit isn't likely to exceed $2.29, as the company increases spending on business-building initiatives.

For the second quarter, American Express earned $762 million, or 59 cents a share, compared to $683 million, or 51 cents a share, last year. Sales rose to $6.36 billion vs. $5.95 billion last year.

Analysts surveyed by Thomson First Call had been looking for a profit of 57 cents a share on sales of $5.9 billion.

"It was a great quarter, very solid metrics," said Michael Cohen, an analyst at CIBC World Markets. Cohen said the quarter was driven mostly by the firm's Travel Related Services unit.

The TRS unit, which includes the firm's credit card and lending operations, saw profit rise 12% to $634 million during the quarter. That was helped by a 17% rise in securitization income and a 9% increase in net finance revenue, or fees and interest. American Express has been attempting to broaden the AmEx card's use and has encouraged merchants to accept the card for day-to-day purchases.

"The company has done an outstanding job of offsetting weakness in corporate spending with growth in consumer, small business and purchasing card initiatives," Cohen said.

After a disappointing first quarter, American Express Financial Advisors reported second-quarter net income of $157 million, an 8% increase over last year, thanks to a 31% jump in investment income.

Still, Chairman and Chief Executive Kenneth Chenault said despite recent improvements in the financial markets, average equity values were below last year's levels. "This, along with net outflows, contributed to lower levels of assets under management and management fees compared with year-ago levels."

Profit at American Express Bank rose 45% to $27 million.

Chenault said he is "still cautious" about the economic outlook but is seeing "some early signs" of a recovery. For that reason, he said, the firm will increase spending on business-building initiatives during the second half of the year "rather than flow the full benefits of our progress to the bottom line."

"The consistent theme this year has been reinvest," said one analyst who follows the stock. "After beating expectations this quarter and beating by a penny last quarter, they're really talking about meeting expectations for the rest of the year."

American Express said it plans to recognize a "below-the-line" charge of around $150 million in the third quarter as it consolidates its off balance sheet assets in accordance with the new Fin 46 accounting rule. The charge will have no effect on cash flow, "and the company expects that it will be reversed at a later date as the structured investments mature."

In a conference call, Chief Financial Officer Gary Crittenden reiterated that he expects earnings growth of 12% to 15% over the long term on an 8% increase in sales. He said the firm is also looking for return on equity of between 18% to 20%.

Shares fell 1.3%, or 59 cents, to $45.01 Monday. The stock has climbed almost 30% this year.