Is this financial icon a buy?
It’s time to explore an iconic financial name. Here is the break down of $AXP, otherwise known as American Express Company.
Current Price: $174.91
52/Wk High: $179.67
52/Wk Low: $89.11
Market Cap: $139.0 Billion
3 Month Performance: 1.33%
Dividend: $0.43 (Quarterly) / 0.99% Yield
Read below for the break down!
American Express Company ( $AXP ) is a major global financial services company that focuses on credit card issuance, premium financial services, and more, all of which is driven by their “spend centric” business model oriented around high-income consumers.
Breaking down the company, American Express operates within three core segments; Global Consumer Services Group (GCSG), Global Merchant and Network Services (GMNS), and Global Commercial Services (GCS).
Furthermore, analyzing the stock price according to TREFIS (@trefis) data, Global Consumer Services accounts for 58.2% of American Express’s stock price.
Digging deeper, Global Commercial Services accounts for 24% while Merchant & Network Services accounts for 17.8% of the stock price.
Exploring how the company generates revenue, American Express builds revenue from two key sources, fees on merchant partners and cardholders.
Sifting through revenue, a majority is generated through merchant partner fees, which the company calls discount revenue. On the flip side, cardholder revenues are made up of card, conversion, and outstanding balance fees.
At its foundation, the company must expand transaction volume, grow its cardholder base, and increase the number of merchant partners to bolster growth. Lastly, the company has noted that international growth is a key focus in the years ahead.
American Express is led by Chairman and Chief Executive Officer (CEO) Stephen J. Squeri, who joined the company in 1985 as a manager within the Travellers Cheque Group.
Exploring leadership, the company is backed by a reliable management team comprised of leaders boasting experience from the likes of Boston Consulting Group, McKesson Corporation, Bank of America, BNY Mellon, and more.
In recent news, American Express announced their partnership with fintech company Extend, with the core goal of growing virtual Card solutions for businesses around the United States.
The partnership allows any US company with an American Express Business Card to enroll and create virtual cards, or in other words tokens.
Leadership was upbeat.
“With today’s announcement, our Business Cards can work even harder for our Card Members through this quick and easy virtual Card option,” Executive Vice President of American Express Dean Henry said.
“This gives our Card Members enhanced flexibility and control across their day-to-day business spending, including for B2B purchases and enabling their employees to pay for expenses.” Henry continued.
The company went on to list the benefits of digital cards and their partnership for businesses including; quick onboarding, improved spending controls, increased flexibility, reduced fraud, and more.
Digging into the numbers, American Express beat Q2 2021 expectations with an EPS of $2.80, better than the analyst’s EPS consensus estimate of $1.67. On a year-over-year basis, EPS improved by 865.52%.
On the revenue front, American Express reported $10.243 billion in Q2 total revenue net of interest expense, representing a strong 33% improvement on a year-over-year basis.
Management noted throughout the quarterly report that key revenue drivers in Q2 included growth in Card Member spending and an increase in the average discount rate as a result of higher travel and entertainment spending.
Exploring revenue, below is a breakdown of revenue by segment compared to Q2 2020 with growth metrics. (2021 vs. 2020)
Global Consumer Services Group:
$6.0 billion vs. $4.7 billion (+28% YoY)
Global Commercial Services:
$3.0 billion vs. $2.3 billion (+35% YoY)
Global Merchant and Network Services:
$1.2 billion vs. $837 million (+47% YoY)
Below is a revenue breakdown by category of revenue compared to Q2 2020 with growth metrics. (2021 Vs. 2020)
$6.327 billion vs. $4.015 billion (+58% YoY)
Net Card Fees:
$1.286 billion vs. $1.141 billion (+13% YoY)
Other Fees & Commissions:
$560 million vs. $449 million (+25% YoY)
$252 million vs. $186 million (+35% YoY)
Net Interest Income:
$1.818 billion vs. $1.884 billion (-4% YoY)
It is important to note that Discount revenue represents 62% of total revenue, Net Card Fees 13%, Other Fees & Commissions 5%, Other Revenue 2%, and Net Interest Income represents 18% of total revenue.
Rotating out of quarterly revenue, American Express reported $2.280 billion in net income, representing a strong improvement over the Q2 2020 level of $257 million. Also note, net income in Q2 of 2019 totaled $1.761 billion.
Shifting into total provisions for credit losses, American Express reported a net benefit of $606 million in Q2, compared to a net expense of $1.555 billion in Q2 of 2020. Leadership noted the improvement in provisions was a result of lower net write-offs and sizable reserve releases.
Exploring network volumes, American Express reported a total Q2 network volume of $316.1 billion, representing an FX adjusted 46% increase in total network volume year-over-year. Although when compared to Q2 2019, total network volume declined by 2%.
Breaking down total network volume, billed business accounted for 85% and increased by 51%, while processed volumes accounted for 15% of total volume, increasing 26% year-over-year.
It is important to note that when compared to Q2 2019, billed business declined 2% and processed volumes declined 2%.
Furthermore, billed business totaled $267.8 billion in Q2, representing an FX adjusted 51% improvement year-over-year when compared to the same time 2020 level of $174.7 billion.
Do note, “billed business” is defined as total transaction volumes from cards and other payment products that are offered by the company.
Breaking down billed business, goods and services (G&S) spending expanded by 31% year-over-year, while travel and entertainment (T&E) spending increased by 51% year-over-year. On the flip side, it is important to take note that when compared to Q2 2019, T&E spending declined 42%.
Shifting into processed volumes, total processed volumes landed at $48.3 billion in Q2, representing an FX adjusted 26% improvement year-over-year when compared to the previous level of $36.3 billion.
Cards-in-force, which represents the number of cards issued or outstanding by American Express expanded by 2% year-over-year to a total of 115 million cards, while US cards-in-force increased by 1% and international cards-in-force grew by 3%.
In total, American express acquired 2.4 million new proprietary cards throughout the quarter according to management.
Leadership was upbeat.
“Our strong second quarter results show that the steps we have taken to manage the company through the pandemic and our strategy of investing to rebuild our growth momentum are paying off,” Squeri said.
Shifting into the balance sheet the numbers are solid.
Total Debt: $124.132 Billion
Total Liabilities: $161.434 Billion
Total Assets: $186.973 Billion
Cash & Short Term Inv: $27.532 Billion
On a valuation basis, American Express does trade at a premium.
Price to Earnings: 20.33x
Forward Price to Earnings: 18.61x
Price to Sales: 3.64x
Price to Book: 5.49x
Price to Free Cash Flow: 16.55x
Management has been effective.
Return on Equity: 29.69%
Return on Assets: 3.74%
Return on Invested Capital: 7.60%
Given the numbers the analysts are bullish with a mean price target of $178.79/share, representing a 2.22% upside.
The high price target is $200.00/share, representing a 14.34% upside, while the low price target is $150.00/share, representing a -14.24% downside.
The big money is quite involved with 85.74% of American Express being owned by institutions. Top holders include Berkshire Hathaway, Wellington Management Company, and State Street Global Advisors.
On a technical basis, American Express has continued to trend to the upside and is elevated. According to the six-month charts, the MACD is moving with slight upward momentum within a tight range around 2.34.
The six-month charts are also indicating an RSI of 58.03 and CCI of 49.72, both of which are mostly neutral compared to previous price action.
Exploring investor sentiment the bears believe a continuing COVID-19 pandemic and sizable competition such as Visa and Mastercard are reasons to predict future downside.
On the flip side, the bulls believe a reliable management team, a relatively strong consumer, and recovering travel industry due to the decline of the global pandemic are reasons to predict upside.
In short, American Express ( $AXP ) is a financial icon, boasting a solid balance sheet, reliable management team, recovering earnings, expanding volumes, and a growing suite of offerings backed by a consumer that continues to spend.
EAT - SLEEP - PROFIT
Disclaimer: This is not direct financial advice, simply an opinion based on independent research.