After 80% Rise, American Express Stock Is Unlikely To Yield Strong Returns

[Updated 12/8/2020] American Express Update

We believe that American Express stock (NYSE: AXP) has an upside potential of 10% in the near term, once the travel bans are revoked and consumer demand improves to the pre-Covid level. AXP trades at $124 currently and is at the same level seen at the end of 2019. Further, AXP stock has gained 80% from the lows of $69 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government which has helped the stock market recover to a large extent. The stock is leading the broader markets (S&P 500 is up about 65% since the March bottom), as investor sentiment is positive due to the improvement in consumer demand over recent months.

American Express has suffered due to the Covid-19 crisis, as consumer spending dropped, leading to lower business for the credit card giant. The company has co-branding card arrangements with several hotel chains and airlines, e.g., Delta Air Lines, Marriott International, British Airways, Hilton Worldwide Holdings, etc. With hotel occupancy rates and the global travel industry being worst hit by the Coronavirus outbreak due to travel bans and widespread panic, American Express is likely to report lower revenues in FY 2020 as compared to the year-ago period – AXP revenues have fallen 17% to a consolidated figure of $26.7 billion for the last 3 quarters from the consolidated figure of $32.2 billion for the 3 quarter period before that. Further, the credit card giant missed the consensus estimates in its recently released Q3 results. It reported revenues of $8.6 billion – 20% less than the previous year, and its provision for credit losses increased to $4.8 billion for the first nine months of 2020, as compared to $2.5 billion in the year-ago period. However, as the economy inches towards normalcy and travel restrictions are eased, American Express’ revenues are likely to see some recovery. In view of the rally in AXP stock since late March, we believe that the stock has limited upside in the near future. Our conclusion is based on our detailed analysis of American Express’ stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

[Updated 10/06/2020] Up 50%, American Express Stock Still Has Potential

We believe that American Express’ stock (NYSE: AXP) has a strong upside potential of 30% in the near term. AXP trades at $104 currently and it has lost 15% in value year-to-date. It traded at a pre-Covid high of $136 in February and is 23% below that level now. Also, AXP stock has gained 52% from the low of $68 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government helped stock prices recover to some extent. That said, the stock is in sync with the broader markets (S&P 500 is up around 50%), as investors are hopeful about a recovery in consumer demand over the coming months, leading to higher transaction volumes. Despite a significant improvement in AXP stock since late March, we believe that the stock still has room to grow in the near future. Our conclusion is based on our detailed analysis of American Express’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 52% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how AXP and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 : 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

American Express vs S&P 500 Performance Over 2007-08 Financial Crisis

AXP stock declined from levels of around $49 in October 2007 (the pre-crisis peak) to roughly $10 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 80% of its value from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by about 51%.

However, AXP recovered strongly post the 2008 crisis to about $34 in early 2010 – rising by 245% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

American Express’ Fundamentals in Recent Years Look Strong

American Express revenues saw a growth of 33% from $32.8 billion in 2015 to $43.6 billion in 2019, mainly driven by growth in global consumer services. Further, the company’s net income improved from $5.2 billion to $6.8 billion, resulting in a strong EPS growth from $5.07 in 2015 to $8.00 in 2019. Further, the company’s Q2 2020 revenues were 29% below the year-ago period, and the EPS figure for the quarter decreased from $2.07 in Q2 2019 to $0.29 in Q2 2020 due to a sharp increase in provision for credit losses.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Keeping in mind the trajectory over 2009-10 and in view of the improvement in American Express’ stock since late March, this suggests a potential recovery to around $136 (30% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $136 level American Express’ stock was at before the coronavirus outbreak gained global momentum.

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