AmEx’s Stock Isn’t Likely To See Much Movement Over 2019

American Express (NYSE: AXP) spent most of 2018 implementing its new growth strategy of attracting more merchants and card users by slashing transaction fees and by offering larger rewards, respectively. As we have pointed out on several occasions in the past, this strategy makes sense in the long run, although the company will likely have to endure several quarters of subpar performance before the new direction begins to yield results. This is evident in the company’s performance over recent quarters: strong growth in card balances and payment volumes have helped the top line, but the accompanying increase in operating expenses as well as card loan provisions have offset these revenue gains to a large extent. The mix of positive and negative trends observed in AmEx’s earnings since early 2018, in turn, has resulted in the company’s stock trading around the $100 range for more than a year now. And as we detail in our interactive dashboard for American Express, we believe the stock is trading close to its fair value, and is not likely to see a lot of movement over 2019 either.

See our full analysis for American Express here

Upbeat Card Lending Activity, Strong Payment Volumes Will Boost Revenues In 2019

American Express made the decision to reduce merchant fees in early 2018 to improve the acceptance of cards issued by it globally – an area in which the company lags behind industry leaders Visa and MasterCard by a significant margin. With a reduction in merchant fees per transaction, the company aims to increase its merchant network at a much faster rate in the near future. And the larger number of merchants should more than make up for the lower fee per transaction in the long run.

The impact of the decision can be seen clearly in the chart below, as total billed business for American Express increased to $1.18 trillion in 2018 from around $1.05 trillion in 2016 and 2017. Although the increase in billed business was accompanied by a reduction in fees as a percentage of billed business, there was an overall increase in fee-based income. We expect this trend to continue in 2019 too, with American Express gaining from increased billed business across its consumer services, commercial services as well as merchant services segments.

At the same time, the increased card usage has helped card loan balances grow steadily over recent quarters. This, coupled with the company’s focus on issuing more credit cards rather than charge cards (which do not have significant interest income associated with them), should drive growth in 2019 too. The stronger card portfolio and improving interest rate environment should translate into higher net interest income for AmEx going forward.

Costs Will Rise In Tandem With Revenues For The Year

As we detailed above, the higher revenues come with a sizable increase in expenses. While fierce competition in the card industry and the rise in mobile payment technology over recent years has forced incumbents to shell out millions of dollars in additional cash to retain and add new customers, American Express has had to ramp up its marketing and card member spends at a faster rate than peers due to its new strategy. While the company has done well to keep other costs steady over recent years, we expect these key cost components to continue to swell in 2019, before leveling off thereafter.

American Express is currently focused on making sure that its new strategy takes off. This is bound to keep costs elevated until the business model finds its new equilibrium. Meanwhile, this ongoing balance between improving revenues and proportionally higher costs will likely keep the stock from rallying substantially. We expect American Express to report EPS of $8.15 for full-year 2019. Taken together with a forward P/E ratio of 13.5, this works out to a price estimate of $110 for Amex’s shares, which is slightly ahead of the current market price.

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