American Express Stock Is On The High Side

AXP: American Express Company logo
American Express Company

[Updated 04/01/2021] American Express Update

After a 105% rally since the March 23 lows of last year, at the current price near $141 per share, we believe American Express’ stock (NYSE: AXP) is trading above its near-term potential. American Express, the credit card behemoth, has seen its stock increase from $69 to $141 off the March 2020 bottom compared to the S&P 500 which gained almost 80% – the stock is leading the broader markets and is trading 3% above its pre-Covid-19 peak in February 2020. This growth could be attributed to continuous improvement in the consumer spending levels and expected mass availability of the Covid-19 vaccine over the coming months, which has shaped investor sentiment in AXP’s favor. 

Although the company outperformed the consensus estimates for revenues and earnings in its recently released fourth-quarter results, its revenues dropped 18% y-o-y to $9.35 billion. It was mainly driven by an 18% y-o-y drop in non-interest revenues due to lower consumer spending levels and a decline in fees charged as a % of card transactions that take place with partner merchants (discount rate). Further, the company suffered a 17% decrease in net interest income due to interest rate headwinds. On a similar note, American Express’ revenue for the full year 2020 decreased by 17% y-o-y to $36.1 billion, primarily due to lower discount fees and a drop in net interest income.

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American Express is very sensitive to a change in consumer spending patterns, which directly impacts card transaction volumes and outstanding card loans. Further, AXP has co-branding card arrangements with several hotel chains and airlines. With global travel and hotel occupancy rates at the receiving end of the Covid-19 crisis due to travel bans and other restrictions, and a decrease in consumer spending due to economic slowdown, the company’s top-line has suffered. However, the consumer spending levels have seen some recovery over the recent quarters. Further, as more and more people get the Covid-19 vaccine and the economic conditions improve over the coming months, it will likely increase card transaction volumes. That said, the recovery will likely be gradual, and an immediate jump in transaction volumes is unlikely. Additionally, it will take some time for the global travel and hospitality industry to recover to the pre-Covid-19 levels. Overall, all the above factors will restrict American Express’ revenues to $40 billion in FY 2021. Also, AXP’s P/E multiple changed from around 12x in 2018 to close to 32x in 2020. While the company’s P/E is just below 38x now, there is a downside risk when the current P/E is compared to levels seen in the past years – P/E multiple of around 32x at the end of 2020. Our dashboard “What Factors Drove 48% Change In American Express Stock Between 2018-End And Now?” provides the key numbers behind our thinking.

[Updated 05/08/2020] Is American Express Expensive At $87?

American Express’ (NYSE: AXP) stock has gained more than 23% since hitting a low of $69 on March, 23. However, we believe that American Express’ stock still has upside potential. Our belief stems from the fact that the company’s stock is still 30% lower than it was at the beginning of 2020 and a little over 9% lower than it was at the end of 2017. Our dashboard, ‘What Factors Drove 23.6% Change In American Express Stock Between 2016 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

American Express’ revenues have grown roughly by 23% from 2016 to 2019, which translated into a similar growth in Net Income (earnings margin dropped in 2017 due to the enactment of the U.S Tax Act, before normalizing in the subsequent year).  However, earnings growth, on a per share basis, was a much higher 42%, partially driven by share buy-backs. Specifically, the company has invested about $10.7 billion in repurchases in the last three years, resulting in about 11% lower outstanding shares. While American Express did have about $36 billion in cash as of the last report, we believe it will likely be challenging for the company to sustain this level of buybacks.

Finally, American Express’ P/E ratio increased from about 12.5x at the end of 2016 to 15.4x at the end of 2019. While American Express’ P/E is down to about 10.8x now, which is at the lowest level seen over the recent years, there is a possible upside for American Express’ multiple when compared to levels seen in the past years – P/E of 15.4 at end of 2019, and 11.7x as recent as in late 2018.

How Is Coronavirus Impacting American Express’ Stock?

American Express stock has suffered as states and countries are on lockdown, which will hurt consumer spending and the global credit card industry. Further, 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. Notably, the Delta co-brand portfolio represented approximately 8% of its worldwide billed business and roughly 22% of worldwide Card Member loans as of December 31, 2019. With hotel occupancy rates and the global travel industry being hard hit by the Coronavirus outbreak due to travel bans and social distancing, it could impact the credit card giant’s revenue prospects for the year. While the Q1 results were on similar lines, we believe the company’s results for Q2 will further confirm the hit to its revenues. It is also likely to accompany a lower Q3 as-well-as 2020 guidance.

However, if there are signs of abatement of the crisis by the time Q2 results are announced, the company’s stock could see an upturn. Although AXP’s 30% decline since the beginning of 2020 has out-performed Discover Financial’s 51% drop over the same period, it is still more than the S&P 500 (-12%). In the current scenario, we believe American Express’ stock is likely to remain around its current levels, with good upside potential post coronavirus.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. It complements our analyses of Coronavirus impact on a diverse set of American Express’ peers. The complete set of coronavirus impact and timing analyses is available here.

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