American Express Stock To Edge Past The Consensus In Q3?

American Express (NYSE: AXP) is scheduled to report its fiscal Q3 2021 results on Friday, October 22. We expect American Express to edge past the earnings and revenue consensus estimates. The credit card giant outperformed the street expectations in the last quarter, with revenues increasing by 33% y-o-y to $10.2 billion. It was because of a 45% y-o-y increase in non-interest revenues, mainly due to a 58% rise in discount fees. However, a 4% drop in net interest income (NII) did offset some of the positive impacts of the growth. Further, the bank posted an adjusted net income of $2.25 billion in the quarter – more than nine times the year-ago figure. This was primarily due to a decrease in provision for credit losses from $1.6 billion to -$606 million in the second quarter, partially offset by higher non-interest expenses as a % of revenues. We expect the same trend to continue in the third quarter.

Our forecast indicates that American Express’ valuation is $182 per share, which is 3% above the current market price of close to $177. Our interactive dashboard analysis on American Express’ Earnings Preview has more details. 

(1) Revenues expected to be just ahead of the consensus estimates

American Express’ revenues for full-year 2020 were $36.1 billion – 17% below the year-ago period. It was due to a 20% y-o-y drop in the non-interest revenues followed by a 7% decline in the NII.

• AXP generates close to 80% of the total revenues from non-interest income. Out of which, discount fees constitute approximately three-fourth of the non-interest income –discount fee is the cut AXP gets from merchants on a per card transaction basis. The company reported a 20% y-o-y drop in the revenue stream to $28.1 billion in 2020, primarily driven by a 22% decrease in discount fees. It was due to lower network volume and some negative movement in the discount rate. Further, the same trend continued in the first quarter of 2021, with non-interest revenues declining 9% y-o-y. However, the segment bounced back in the second quarter – up 45%, due to a 50% jump in the worldwide network volumes. It was partly due to the recovery in the economy and partly due to the easing of the Covid-19 related restrictions, including travel bans. We expect the same momentum to continue in the third quarter as well.
• The NII generates around 20% of the total revenues. It suffered a 7% y-o-y drop to $8 billion in 2020 due to interest rate headwinds and lower outstanding loan balances. The revenue stream continued to see negative growth in the first and second quarter, with 21% y-o-y and 4% drop respectively. We expect the third-quarter results to be on similar lines.
• Overall, we expect American Express’s revenues to touch $40.3 billion for FY2021.

Trefis estimates American Express’s fiscal Q3 2021 revenues to be around $10.71 billion, 2% above the $10.52 billion consensus estimate. We expect the total non-interest revenues to drive the third-quarter results.

Moving forward, we expect the network volumes and loan balances to improve with recovery in the economy. However, the low-interest rates are unlikely to see an immediate revival, hurting the NII. Our dashboard on American Express’ revenues offers more details on the company’s operating segments along with our forecast for the next two years.

2) EPS is likely to top the consensus estimates

American Express Q3 2021 adjusted earnings per share (EPS) is expected to be $1.82 per Trefis analysis, almost 2% above the consensus estimate of $1.79. The bank’s adjusted net income decreased 54% y-o-y to $3 billion in 2020 due to the compound effect of three factors – first, lower revenues; second, a 32% y-o-y increase in the provisions for credit losses to $4.7 billion; and third, higher non-interest expenses as a % of revenues. While the first and third factors remained consistent in the first quarter of 2021, a favorable decrease in provisions for credit losses from $2.6 billion to -$675 million led to a 5.6x rise in the net income figure. The profitability numbers further improved in Q2, thanks to the revenues growth and a drop in the provisions figure. We expect the same trend to drive the third-quarter results

Going forward, we expect American Express’s net income margin to see some improvement in FY2021, leading to an adjusted net income of $6.8 billion – up approximately 127% y-o-y. This will likely result in an EPS of $8.67.  

(3) Stock price estimate 3% higher than the current market price

We arrive at American Express’ valuation, using an EPS estimate of around $8.67 and a P/E multiple of 21x in fiscal 2021. This translates into a price of $182, which is 3% above the current market price of around $177. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year 

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