[Updated 02/22/2022] American Express Valuation Update
American Express’ stock (NYSE: AXP) has gained roughly 19% YTD as compared to the 9% drop in the S&P500 over the same period. Further, at its current price of $195 per share, it is trading just below its fair value of $197 – Trefis’ estimate for American Express’ valuation. The company posted better than expected results in the fourth quarter, with revenues increasing 30% y-o-y to $12.1 billion. The growth was primarily due to a 23% y-o-y growth in the global consumer services group (GCSG). Further, revenues in the global commercial services and global merchant & network services increased 30% and 31%, respectively. The revenues benefited from improvement in network volumes (up 29% y-o-y), total cards-in-force (up 9% y-o-y), and average proprietary basic card member spending (up 28%). In addition, the outstanding loan balance also increased by 21% y-o-y in the quarter. Altogether, the above growth translated into a 19% increase in the adjusted net income to $1.7 billion, despite higher operating expenses as a % of revenues.
The company’s total revenues increased 17% y-o-y to $42.4 billion in 2021. This was because of a 14% rise in the global consumer services group, coupled with an 18% jump in global commercial services, and a 20% increase in global merchant & network services segments. The non-interest revenues improved in the year, thanks to the recovery in the consumer spending levels. That said, the net interest income (NII) continued to suffer – NII was down 3% y-o-y.
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The Federal Reserve is expected to increase the interest rates in 2022. This move is likely to boost the NII. Further, the network volumes and average card spending are likely to grow in 2022. Overall, American Express revenues are expected to remain around $49.8 billion in FY2022. Additionally, AXP’s adjusted net income margin increased from 8.4% to 18.7% in 2021, thanks to the favorable decrease in the provisions for credit losses. We expect the provisions figure to slightly increase in 2022, leading to some drop in the net interest margin. The company is likely to report an adjusted net income of $7.1 billion and an annual EPS of $9.48. This coupled with a P/E multiple of just below 21x will lead to the valuation of $197.
Below you’ll find our previous coverage of American Express stock where you can track our view over time.
[Updated 07/12/2021] At $172, American Express Stock Has Some Downside
American Express stock (NYSE: AXP) has gained around 42% YTD, increasing from about $121 at the beginning of 2021 to around $172 currently, significantly ahead of the S&P500, which grew 16% over the same period. Trefis estimates American Express’ valuation to be around $152 per share – 12% below the current market price. The stock rise over the recent months was due to, in general, positive investor sentiment toward the U.S. financial stocks, thanks to the approval of the $1.9 trillion stimulus plan and the fast pace of the Covid-19 vaccination program.
American Express posted $36.1 billion in revenues for the full year 2020 – down 17% y-o-y. This was because of lower discount fees, the decline in transaction volumes, and negative growth in outstanding loans. The transaction volumes and outstanding loans were negatively affected due to the lower consumer spending levels in the year, which suffered due to the Covid-19 crisis and the economic slowdown. Additionally, Covid-19 related restrictions directly impacted the hospitality industry and airline business, which further impacted the company’s top-line.
The firm posted better than expected earnings in the first quarter of 2021, while its top-line missed the mark. It reported revenues of $9.06 billion, which was 12% less than the previous year. This could be attributed to a 9% y-o-y drop in non-interest revenues coupled with a 21% decline in net interest income (NII). While the NII suffered due to a lower interest rate environment and a drop in outstanding loan balances, non-interest income decreased due to a dip in consumer spending levels and a lower average discount rate. That said, the company’s adjusted net income improved from $333 million in the year-ago period to $2.2 billion in the quarter. This was due to a favorable decrease in the provisions for credit losses from $2.6 billion to -$675 million.
Moving forward, we expect NII to continue to suffer in FY2021, due to the lower interest rates, which are unlikely to see an immediate return to the pre-Covid-19 levels. That said, the consumer spending levels are likely to recover in the current year, benefiting both the transaction volumes and the outstanding loan balances. Overall, American Express’ revenues are likely to remain around $38.2 billion in FY2021. Additionally, the company’s adjusted net income is likely to remain around $5.7 billion in the year – almost 90% above the 2020 figure. It will likely result in an EPS of $7.26, which coupled with a P/E multiple of close to 21x, will lead to the valuation of $152.
[Updated 02/05/2021] American Express Stock Is Trading Close To Its Fair Value
After more than an 80% gain since the March 23 lows of the last year, we believe that American Express stock (NYSE: AXP) has limited upside. Trefis estimates American Express’s valuation to be around $130 per share – approximately 5% above the current market price. American Express is a global financial services company, which offers charge and credit card products along with travel-related services to consumers and businesses across the globe. While the company surpassed consensus estimates in its recently released fourth-quarter results, its revenues dropped 18% y-o-y to $9.35 billion. It could be attributed to an 18% y-o-y drop in non-interest revenues due to lower consumer spending and a drop in discount rate, followed by a 17% decline in net interest income.
American Express is the third-largest player in card transaction volume in the U.S. and derives the majority of its revenues from discount fees – around 57% in 2020. The fee is charged as a % of card transactions that take place with partner merchants. Hence, the company is very sensitive to changes in consumer spending patterns. Due to the Covid-19 crisis, the consumer spending levels dipped, hurting American Express’ top-line. Further, the company has co-branding card arrangements with several hotel chains and airlines. The hotel occupancy rates and the global travel industry were directly impacted by the Coronavirus outbreak. Overall, the above factors negatively impacted American Express’ revenue prospects in 2020, restricting the figure to $36.1 billion – down by 17%. That said, the consumer spending levels have seen some recovery over the recent quarters. Further, the mass availability of the Covid-19 vaccine and improvement in economic conditions over the coming months will likely increase card transaction volumes. It is likely to benefit the company’s top-line, enabling American Express’s revenues to touch $40 billion in FY 2021.
The operating expenses as a % of revenues rose from 72.4% in 2019 to 75% in 2020. Further, the company increased its provisions for credit losses to $4.7 billion for the full year 2020, as compared to $3.6 billion in the year-ago period. As a result, the adjusted net income figure took a hit of 54% on a year-on-year basis, reducing the EPS to $3.77. However, as the economy moves toward normalcy, provisions for credit losses are likely to see some decrease. Additionally, American Express is likely to start its share repurchase program in the first quarter of 2021. This will likely enable the EPS figure to touch $6.84 in FY2021. Overall, the EPS of $6.84 coupled with the P/E multiple of just below 19x will lead to a valuation of around $130.
[Updated 08/06/2020] American Express Stock Gained 38% Over Recent Months, Is It Still Attractive?
American Express stock (NYSE: AXP) lost more than 44% – dropping from $123 at the end of 2019 to around $69 in late March – then spiked 38% to around $95 now. This implies it’s still 23% lower than at the start of the year.
This can be attributed to 2 factors: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020, and the near-term consumer demand, dropped. This could negatively affect the company’s top and bottom line due to a significant decline in card spending on travel, hotels, and other discretionary items coupled with increased exposure to potential loan defaults. The multi-billion-dollar Fed stimulus provided a floor, and the stock recovery owes much to that.
But this isn’t the end of the story for American Express’ stock
Trefis estimates American Express’ valuation to be around $104 per share – about 10% above the current market price – based on an upcoming trigger explained below and one risk factor.
The trigger is an improved trajectory for American Express’ revenues over the second half of the year. We expect the company to report $36.7 billion in revenues for 2020 – around 16% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to open up in Q3. The easing of lockdown restrictions in most of the world is likely to help consumer demand, resulting in higher spending. 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. Further, American Express derives around 80% of its revenues from fees income which is charged as a % of card transaction volume. As travel restrictions are eased and transaction volume picks up in the coming months, the credit card giant is likely to see some improvement in revenues. Overall, we see the company reporting an EPS of around $3.13 for FY2020.
Thereafter, American Express’ revenues are expected to improve to $40.7 billion in FY2021, mainly due to higher discretionary consumer spending on travel, hotels, and other items. Further, the net income margin is likely to improve as compared to the previous year due to a decline in provisions for credit losses, leading to an EPS of $6.66 for FY2021.
Finally, how much should the market pay per dollar of American Express’ earnings? Well, to earn close to $6.66 per year from a bank, you’d have to deposit about $725 in a savings account today, so around 110x the desired earnings. At American Express’ current share price of roughly $95, we are talking about a P/E multiple of around 14x. And we think a figure closer to 16x will be appropriate.
That said, consumer finance is a risky business right now. Growth looks less promising, and near-term prospects are less than rosy. What’s behind that?
American Express is the third-largest player in card transaction volumes in the U.S. Further, it has a sizable portfolio of consumer and commercial card loans – around $83 billion in FY2019. The economic downturn could negatively affect the loan repayment capability of its consumers, exposing the company to significant loan defaults. As a result of this exposure, American Express has increased its provisions for loan losses to around $4.2 billion by Q2 2020– roughly 2.5x of the year-ago period, leading to a huge spike in total expenses for the year. If the economic condition worsens, this figure could further increase in the subsequent months.
The same trend is visible across American Express’ peer – Capital One. Its revenues are likely to suffer in FY2020 due to a drop in consumer spending. Further, its margins are likely to drop due to build-up in provisions for credit losses in anticipation of bad loans. This would explain why Capital One’s stock currently has a price of $65 but looks slated for an EPS of around $7.20 in FY2021.
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|S&P 500 Return||-4%||-9%||94%|
|Trefis MS Portfolio Return||-2%||-11%||251%|
 Month-to-date and year-to-date as of 2/22/2022
 Cumulative total returns since the end of 2016