On Friday, October 18, American Express (NYSE:AXP) continued the trend of positive earnings with an easy beat in both third-quarter revenue and earnings. Just as importantly, the company issued forward earnings guidance that has growth in the 8-10% range. Analysts had projected an 8.9% growth.
In terms of the all-important bottom line, AXP posted a net income of $1.76 billion which comes out to earnings per share of $2.08 which beat analysts’ expectations by 6 cents per share. This was also a significant beat based on the numbers for the same quarter last year. At that time, the company reported net income of $1.65 billion, or $1.88 per share.
The report marked the ninth consecutive quarter that the company has delivered foreign exchanged adjusted revenue growth of at least 8%.
On the conference call that followed the release of the earnings report, Chief Executive Steve Squeri said, "The trends we saw in the business this quarter continue to be consistent with an economy that continues to grow, albeit at a more modest pace than last year." Squeri also pointed out that card fee revenues had grown 19% in the prior quarter and, for the first time, exceeded $1 billion. In 2019, nearly 70% of the cards that AmEx has acquired are fee-based products. This is providing the company with recurring revenues, similar to subscription services.
Strong consumer spending bodes well for American Express stock
The American Express earnings beat continued a string of positive earnings reports from the financial sector. The report also lent support to the notion that American consumers continue to spend – at least through the summer. This is in contrast to businesses that have begun to show reduced spending and borrowing based on recession fears. To that end, the only negative for AXP came from a slight increase in delinquencies which suggests that loan activity may be nearing a peak. However, the company did announce that lending was up 9% for the quarter with 60% of that activity coming from existing customers.
In recent years, American Express has faced threats to its pre-eminent position as the credit card for affluent consumers. J.P. Morgan Chase now offers their Sapphire Reserve card and Citigroup offers their Prestige Card. This is happening at a time when AmEx is relying more and more on strong consumer spending and borrowing.
That’s why it caught my attention to hear that AmEx was expanding its digital partnerships. On the call, the company announced a new offering including the ability for U.S. consumer card members to pay for purchases made through PayPal with membership reward points. The company also said that, on the merchant side, they are on track to achieve virtual parity coverage in the U.S. through their OptBlue partnerships.
American Express is not abandoning their core business customer
However, American Express is also making efforts to re-energize its core business customers. Just before their earnings announcement, American Express announced what they termed a “reimagined Corporate Program” which includes a new suite of products including Corporate Green, Gold, or Platinum cards. Some of the member benefits include new partnerships with Uber and CLEAR®. The new program also expands its partnership with Hilton.
In addition to the Corporate Program, American Express unveiled The Corporate Program for Startups. This dynamic new program provides an option of full corporate liability to go along spending capacity that flexes with the startup’s linked business bank account. This gives a business dynamic spending power that will not impact their personal credit score and does not require a personal guarantee nor a security deposit. This is a response to the current economic climate which has not been particularly good for start-up businesses.
Is American Express stock a buying opportunity?
Is now a good time to jump in on AXP? If you focus on the short-term, there is a reason to question if the stock will remain significantly above a $112 level that has been a point of resistance. Even after the earnings announcement, the stock dropped about $2 off its opening price of around $119.50 per share. Some analysts are anticipating the stock may drop to test recent lows around $112.
In the past month, AXP has dropped by 7.2%. This is a larger drop than the decline for the SPDR Financial Select Sector that has dropped 0.1% and the Dow Jones Industrial Average which had declined 0.7%. However, even sitting at current levels, the stock is up over 22% for the year. Still, investors seem to be spooked by the stock’s drop of over 10% since it reached its 52-week high near $130 in July.
But a stock like American Express has always been a long-term play. One look at the company’s stock chart since 1991 shows a stock that has continued on an upward trend. Value investors could certainly find better dividend plays. The stock pays just a 1.46% dividend yield. However, that is a significantly higher dividend than investors get with either Mastercard or Visa stock.
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