American Express: Reassuring Consistency And Stability (NYSE:AXP) (2024)

Recap

American Express (NYSE:AXP) reported strong earnings on Friday, with revenue of $15.8B growing 11% year-on-year and EPS of $3.33 growing a substantial 39%. The stock jumped over 6% as investors were satisfied that management's 2024 guidance was on-track, and consumer credit remains healthy. The reassuring consistency and stability of AXP, stood in contrast to the bloodshed Friday in names such as NVIDIA (NASDAQ:NVDA), and Super Micro Computer (NASDAQ:SMCI). The confidence surge in AXP reinforces my belief it is a must own name in a portfolio. I reiterate my recommendation to BUY.

Management reiterated their confidence in achieving 2024 guidance of revenue growth between 9-11% and EPS growth of 13-17%. As investors, it was nice to see shares outstanding fall 3% year-on-year, which is in keeping with the five-year trend as I wrote about previously. The steady buyback cadence helps to enhance bottom-line results.

For me, the standout items in the quarter were International Card Services which grew at 13%, loan growth of 17% and Millennial & Gen-Z spending growth of 15%. Net Interest Income makes up about 25% of the firm's revenue in Q1, this line item will likely be supported by recent stickier than expect inflation, which has caused markets to pare back forecasted interest rate cuts.

Interestingly, management noted that its younger demographic is more inclined to pull out their AXP card when picking up a tab than older folks. This cultural attitude to using Amex cards is an important future driver for the firm, as over time, millennial and Gen-Z customers will become an increasingly large proportion of customer mix.

In fact, we see that younger customers use their cards more overall and this is even more pronounced in certain spend categories. For example, customers aged 35 and under use their cards at restaurants over 70% more on average than other customers in this segment. (Christophe Le Caillec, CFO)

We saw pockets of weakness in the results, with SME billing the clearest weak point, delivering just 1% growth. This compared to growth of 5% at larger corporate clients. I see no reason to be overly concerned by this segment weakness, given other business lines are performing admirably. The stock price reaction on Friday suggested the market was willing to shrug this off also and focus on the positives.

Credit Metrics

Credit remained strong at AXP in the quarter. Net Write-offs, a measure of loans deemed unrecoverable, rose 50 basis points year-on-year and ten basis points sequentially. Current write-offs stand at 2.1%, a level which remains lower than pre-pandemic norms.

The normalization of credit metrics was inevitable, given the historically low levels which persisted throughout the pandemic era. Such low levels were the result of a confluence of factors, including government stimulus cheques, student debt relief and an economy with unemployment less than 4%. Indeed, the rise in write-offs, has been well guided by management since last year hence markets brushed off weakening credit rather than view it as a potential issue going forward.

Going forward, we continue to expect these delinquency and write-off rates to increase over time. (Jeff Campbell, former CFO, Q1 2023 earnings)

Despite softening write-offs, I see no cause for alarm at current levels. AXP management's economic forecasts are guiding for a very gradual increase in unemployment, under their base case scenario. If we assume the base case to be the most likely outcome over the next few years, I suspect write-offs are likely to plateau around current levels.

Investor Day

Looking ahead, AXP is hosting its 2024 investor day on April 30th. I do not expect any dramatic updates to company strategy, but I will be listening closely to hear how management are thinking about the trajectory of international expansion and capital allocation strategy. The firm has a payout ratio of just 20%, so any update to planned cash remittance to shareholders could serve as a tailwind for the stock and increase its attractiveness to investors with an income mandate.

I would not be surprised if AXP makes an announcement at investor day relating to using AI in its business. On the Q1 earnings call, CEO Stephen Squeri noted investor day would include some discussion about enhancing productivity through technology. As AXP's business model relies heavily on using proprietary data related to customer spending to enhance promotions. It seems entirely plausible that AI could be employed to improve promotion targeting, based on AI's assessment of customer wants.

Employing AI in this manner, would be similar in nature to Meta's (NASDAQ:META) approach of integrating AI into feed recommendations. Essentially, the firm seeks to better utilize first party data in order to better understand customers. In turn, this provides users with more content they would like to see in their feed. Thereby, creating a continuous feedback loop that seeks to further entrench users in their ecosystem. AXP has a similar advantage in the payments industry, due to possession of large amounts of data and a business model that is driven by personalized promotions.

Valuation

Despite a price increase of over 23% year-to-date, AXP remains attractively valued for a high-quality compounder. Below I show valuation across three metrics. On a P/E basis, shares trade right in line with the five-year mean forward P/E. Looking at free cash flow, AXP yields close to 14%, which is a very healthy number, and on a PEG basis, it trades at an undemanding 1.28x. I think viewing the valuation in this way shows the attractive combination of a reasonable headline valuation coupled with exceptional cash generation, and solid growth credentials.

Conclusion

Q1 earnings confirmed that 2024 is on track to deliver double-digit revenue and mid-teens EPS growth. Coming into earnings, investors were chiefly concerned with consumer spending trends and were watching closely for any signs of cracks. AXP delivered us clear confirmation that despite small pockets of weakness, their growth algorithm is chugging along nicely. I am expecting more of the same in the coming quarters and given the stock trades at an undemanding valuation, I see AXP as a top GARP idea in today's market.

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