Has American Express’ Stock Exhausted Its Growth Potential?

American Express’ (NYSE: AXP) stock has rallied nearly 35% since the beginning of 2019 to its current value of around $128 thanks to the company’s strong performance in the first three quarters of the year. We believe that American Express’ stock is fairly valued and maintain a price estimate of $124 per share while acknowledging the fact that the cards and payments giant can potentially unlock a substantial amount of value over coming years from a potential entry into China’s payment industry. Trefis details the key components of American Express’ valuation in an interactive dashboard, along with our forecast for full-year 2019.

In Q3 2019, American Express’ net revenues grew roughly 8% y-o-y to $10.99 billion, largely driven by a 12% increase in net interest income followed by a 7% rise in total non-interest income. Further, the company’s adjusted net income saw an improvement of 6%, rising from $1.62 billion in Q3 2018 to $1.72 Billion in the third quarter of 2019.

FY 2019 began with a lot of uncertainties surrounding the U.S.-China trade deal, the yield curve inversion, and a sharp drop in retail sales figures for January’ 19. Despite the uncertainty associated with the global macroeconomic environment, the company has consistently reported revenue growth of 7-8% over the last three quarters, and we expect the same trend to continue in subsequent quarters.

We arrive at the stock price estimate for American Express as:

Stock Price = (Total Revenue x Net Income Margin / Shares Outstanding) x P/E Multiple

Global Consumer Service Would Have Driven Growth In American Express’ Revenues For Full Year 2019

• American Express’ Total Revenues have increased from $32.1 billion in 2016 to $40.3 billion in 2018.
• The revenues increased 15% y-o-y in 2017, which includes a 38% jump in Global Merchant & Network Services due to higher fees as % of Global Transaction Volume.
• Further, Global Commercial Services grew 19% y-o-y in 2017 due to a 29 basis point (0.29% point) increase in fees as % of Commercial Transaction Volume.
• We expect revenues to have grown 7% to $43.2 Billion in 2019, mainly driven by a 9% increase in Global Consumer Services followed by a 6% rise in Global Commercial Services.
• Notably, Global Merchant & Network Services are expected to grow 3% on year-on-year basis for full year 2019.

We capture the factors that have driven changes in revenues of American Express’ segments over recent years along with our forecast for 2020 in a separate interactive dashboard.

Drop In Operating Margin Would Reduce The Net Income Figure

• Adjusted Net Income has fluctuated over the last three years from $5.3 billion in 2016 to $2.6 billion in 2017, before increasing to $6.8 billion in 2018.
• We expect the Net Income to come in around $6.6 billion in 2019 which is 3% less than the previous year.
• This would be driven by lower operating margin (down 46 bps) as compared to 2018, coupled with higher expected tax rate.
• Net Income Margin very likely decreased from 16.8% in 2018 to 15.2% in 2019, mainly driven by higher effective tax rate.

This Lends Support To A $124 Price Estimate For American Express’ Shares

• American Express has regularly invested in share repurchases to boost shareholder returns. Further, it is expected to repurchase $4.6 billion worth of shares in 2019.
• Lower outstanding shares should result in American Express reporting an EPS figure of $8.10 in 2019.
• Using a 15.3x P/E Multiple on expected 2019 EPS of $8.10, this works out to our price estimate of $124 for American Express’ Stock.

Details about how American Express’ P/E multiple compares with peers Discover Financial, Mastercard and Capital One are available in our interactive dashboard.

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