Credit card lender American Express (AXP), or simply Amex, reported its Q2 results on July 19. Despite a slight miss on revenue expectations and signs of slowing consumer spending, the results were decent. Amex’s strong credit quality in Q2, combined with marketing strategies aimed at expanding market share, indicates that the company’s financials are on the right track. With a solid long-term business and a share price that, while near its all-time highs, still trades at a lower valuation multiple compared to its peers, my long-term bullish outlook for AXP remains strong.
American Express’ Q2 Earnings Review
The New York City-based credit card lender delivered mixed results for its June quarter. The company beat EPS estimates significantly, posting $4.15 per share compared to the expected $3.26, marking a year-over-year improvement of 43.6%. However, revenue fell slightly short, coming in at $16.33 billion, nearly 2% below Wall Street’s expectations, despite an 8.5% year-over-year increase.
The 2.7% drop in stock price post-earnings reflected the mixed results. Given American Express’s premium positioning in the credit card market, expectations are particularly high.
Concerns about a slowdown among lower-end consumers due to persistent high interest rates have now extended to high-end consumers, who make up American Express’s core base. U.S. consumer spending slowed to 6.5% from 8.5% last quarter, with moderated spending in travel & entertainment. Growth in goods & services spending has also decelerated.
At the end of the day, the volume of transactions and the number of fee-paying cardholders should be the primary drivers of American Express’ revenues. Looking at American Express’ total network volume for Q2, it reported $441 billion, marking a 3% year-over-year increase.
This fell short of the consensus expectation of around $448 billion but still represents growth from $419 billion in Q1 and $427 billion in the same quarter last year. Despite this, net card fees were reported at $2.06 billion, reflecting a 15% annual increase.
Nevertheless, I view the results as decent, given that the core business performance remains strong. According to management, the solid momentum allows for a 15% increase in marketing investments compared to last year, without relying on any transactional gains (such as the sale of Accertify). In other words, this reflects a more aggressive stance by American Express in relation to competitors, aiming to capture a larger market share.
In recent years, American Express has added 23 million new cardholders, including many from Gen Z and Millennials. Previously, the company struggled to attract younger customers, but that’s been changing. In Q2, growth from Millennials and Gen Z accounted for 33% of Amex’s total billings and represents roughly 60% of the company’s new customers worldwide.
Credit Quality Speaks Louder
When it comes to credit quality, American Express has some of the highest standards in the industry.
About 23% of American Express’s revenue is linked to credit quality. This means a smaller portion of its total revenue depends on how well customers manage their credit. The company relies more on other types of revenue, such as Discount revenue, as you can see below.
In Q2, credit quality remained strong. The total provision for credit losses was $1.27 billion, slightly higher than the $1.17 billion in actual write-offs. This suggests American Express is setting aside more funds than it currently needs to cover bad debts.
The net write-off rate was 2.1%, stable compared to Q1 and slightly better than the pre-pandemic rate of 2.2%, indicating effective credit risk management. Additionally, the rate of accounts 30+ days past due was 1.2% in Q2, down from the pre-pandemic rate of 1.5%. This means fewer customers are falling behind on payments, which is a positive sign of financial health and creditworthiness.
Overall, American Express’s credit quality indicates that higher-end American consumers appear to be in decent financial shape. However, investors are watching closely to see if inflation will start impacting spending in the future. With many new card members, including Gen Z and Millennials, this is a new scenario for the company. It still appears to be under control, but it’s something to keep an eye on.
On AXP Stock
While the June quarter for American Express wasn’t outstanding, especially with concerns about high-end consumer spending, the financial results still suggest the company is on the right track. Amex raised its 2024 EPS guidance to $13.30-$13.80, up from the previous range of $12.65-$13.15. If the higher end is achieved, it will represent an annual increase of around 17.4%, higher compared to peers like Visa (V) and Mastercard (MA), with consensus EPS growth for 2024 at 13.1% and 16.4%, respectively.
However, the market doesn’t seem to be giving American Express a fair multiple for this growth. Amex stock trades at a forward P/E of 18.4x, while Visa’s is 25.6x and Mastercard’s is 30.3x. AXP’s forward P/E is 3% below its historical average over the past five years, and the stock is very close to its all-time high, suggesting a moderate valuation.
I believe that AXP shares should continue climbing since elevated interest rates are here to stay for longer, which is good news for lenders in general. While Amex’s volume figures and number of fee-paying cardholders keep improving in the current scenario, things should keep going fine for the cardholder company.
Is AXP A Buy, According to Analysts?
The Wall Street consensus on AXP is predominantly bullish, with a Moderate Buy rating. Of the 18 analysts covering the company, seven are bullish, nine are neutral, and two are bearish. The average AXP stock price target is $247.81, indicating a timid 3.2% upside potential from the most recent share price.
Key Takeaway
American Express’ second-quarter results were solid, though not flawless, given slight concerns about high-end consumer spending and a slight miss on top-line estimates. The company’s robust and stable credit quality indicates that, even with moderate top-line growth, the bottom line should continue to grow strongly. It could potentially outperform peers, which trade at a significant premium.
Looking out to the long term, it’s unlikely that consumer spending will remain pressured for years or that American Express will lose its appeal to its core customers. If this remains the case, AXP could keep rising and hit new all-time highs.
