American Express Great Again, But Not Time To Buy Now

seekingalpha11-19 18:53

American Express has risen 77% since my buy rating a year ago, so is getting downgraded to a hold as it trades at a 10-year high and is mostly overvalued now.There are positive indicators of revenue ...

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A","BK4166":"消费信贷"},"translate_title":"美国运通再次伟大，但现在不是购买的时候","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AXP":0.9},"content_text":"American Express has risen 77% since my buy rating a year ago, so is getting downgraded to a hold as it trades at a 10-year high and is mostly overvalued now.There are positive indicators of revenue and earnings growth expected, particularly driven by loan growth and expected consumer spending growth.The overall firm has strong credit ratings and stable regulatory capital.Amex has to compete with brands like Visa and Mastercard, who command a much greater market share of the credit card space.There is not a strong dividend case to be made with a yield under 1% now.   funky-data Thesis: Downgrade to a Hold & Wait On Some Further Upside The cash register seems to keep ringing for this company, and remaining on the theme of the holiday spending season we are entering, I thought it was fitting to cover none other than financial firm American Express (NYSE:AXP). In my Sept. 2023 coverage, I called it a buy, excited by the firm's low charge-off ratio and continued dividend growth. Since my bullish call, the share price has grown +77%, now hovering near $287 as of this article writing. Today, I'll be downgrading my rating to a hold at this time, agreeing with the consensus from Wall Street and the Seeking Alpha quant system. The positive factors of this company include the positive top and bottom-line guidance for EPS and revenue growth, YoY loan growth trends which can contribute to future interest income, expected holiday spending growth in 2024, proven dividend growth over 10 years, and strong credit ratings along with strong regulatory capital. Some negative offsetting factors are that Amex trails behind Visa and Mastercard in market share for credit cards, its profit margin trails key peers as costs rose in Q3, it has a very low dividend yield vs peers, and it is trading at a 10-year-high with valuation at or higher than peer averages, not making it much of a discount buy opportunity now. For this reason, I am compelled to be less bullish this time on this stock than last year, but at the same time I see just enough further market upside to not call for a sell of this otherwise major global financial brand. Overview: A Diversified Financial Stock I think the Amex brand is generally well known and not needful of a long biography, so I think Seeking Alpha's profile page adequately summarizes what the firm does, which is more than just credit cards: It operates through four segments: U.S. Consumer Services, Commercial Services, International Card Services, and Global Merchant and Network Services. The company’s products and services include credit card, charge card, banking, and other payment and financing products; network services; expense management products and services; and travel and lifestyle services. Comparables for use in today's article will be financial-sector stocks that are heavy in consumer credit cards and payment transactions, and my 4 picks are: Capital One (COF), Discover Financial (DFS), PayPal (PYPL), and Mastercard (MA).   Market Picture: Holiday Spending Growth Expected, as Well as Competition for Market Share Although the holiday season is not the only time for credit card spending, we know it as a time of elevated shopping, and this should benefit firms like Amex in the next quarterly results. To put it simply, indicators are that consumers are expected to spend more than last year. In its 2024 holidays outlook, global consultancy PwC said: Shoppers plan to spend an average of $1,638 on gifts, travel and entertainment this holiday season, marking a 7% increase from 2023 and a 15% jump from 2022.   PwC - 2024 holiday spend growth (PwC)While this spending growth may be great for firms with a large credit card business, like Amex, we should also consider its market share in relation to card peers/competitors. For one thing, I've noticed and many of my readers probably have, that Amex is not as universally accepted at merchants as are cards like Visa and Mastercard usually, especially if you use cards globally and not just in the US. I want to point out an Oct 17th article in financial site Bankrate.com, which blames high fees:  According to its website, Amex is now accepted at 99 percent of U.S. places that accept credit cards. But this may be less true in other parts of the world. When you’re out and about, it’s possible to visit a restaurant or retailer that doesn’t accept Amex card payments. That’s because American Express charges merchants a higher fee than competitors do.  Further, let's consider that Visa and Mastercard are dominating the market share of cards, not Amex. According to an October article by Motley Fool: Money:  Visa accounts for 37% of all credit cards in circulation, while Mastercard makes up 32% of all credit cards. American Express comprises 4% of all credit cards in use, while Discover makes up 2%.  Because Amex does not have the dominant market share among credit cards, I think what helps the firm is its diversification beyond just cards. For instance, we can see from its site that it offers banking products like loans too, which, I think, can contribute to future interest-income flows. In addition, going beyond just consumers, it offers products like business lines of credit. With that said, next, let's talk about some of the drivers of earnings looking ahead.   Q3 Results & Outlook: Expecting Further Revenue & EPS Growth With Q3 results from a month ago showing YoY earnings and revenue growth for the firm, which is also evident from its income statement data on Seeking Alpha, such positives may have given further tailwind to its already bullish share price, but more importantly is what was said about the future outlook. I think CEO Stephen Squeri in his earnings commentary pointed to an improved full-year outlook both for the top and bottom line, which should be good news for forward-minded investors: Based on our performance to date and the strong earnings our core business is generating, we are raising our full-year EPS guidance to $13.75 - $14.05, up from $13.30 - $13.80 previously. We continue to expect full year revenue growth that is within the annual guidance range we provided in the beginning of the year, at around 9 percent. In addition, I want to point to another data point, the forward EPS growth expected, according to Seeking Alpha's data, which puts Amex at 189% above this peer average in terms of expected EPS growth:   Amex - fwd EPS growth vs peers (author worksheet & SA data)I think the analyst consensus can also influence bulls to this stock, and the good news is that the estimates call for YoY EPS growth for the next two fiscal years, while there have been 20 upward revisions vs just 1 downward. From my own further research, what, I think, could help drive future interest income for this firm is recent trends in loan growth, since new loans can drive future inflows of interest income. We know from the firm's income statement that their revenue primarily comes from a combination of interest income, and commissions/fees. We can see from the following graphic according to Q3 results there is a trend emerging of steady loan growth for Amex, which, I think, is a positive indicator for future revenue flows, as it shows in the period of FY23Q3 - FY24Q3 a YoY loan growth of 15 - 20% each quarter.   Amex - loan growth (Amex q3 results)I think this steady trend of loan growth can contribute to future interest income flows, and a key item to look for in the next few quarterly results will be an expanding interest margin if the cost of borrowing comes down. With just a few Fed rate cuts so far, I would hate to speculate too far out right now as to what interest rates may look like sometime in 2025, but what we do know as fact is that the Fed has pulled back from its rate hikes for now. This is indicated in the following chart from the St. Louis Fed, showing the federal funds effective rate turning downward this fall.   Fed funds rate reversal (FRED)Profit Margin: Less Competitive Than Key Peers, as Costs Rose To add another angle to this thesis, I typically like to compare a firm's profit margin vs peers. In this case, from the sheet I created below using comparables data, it seems Amex trails behind this peer group by 30% when it comes to profit margin; however, one should consider that Mastercard with a 45% profit margin is heavily skewing things.   Amex - profit margin (SA data & author worksheet)The other major card peer, Visa (V), actually has an even higher profit margin at nearly 55%. If we were to remove Mastercard from this list, however, Amex would still fall behind this peer group's average on profit margin, so I think they have more work to do in terms of being more efficient in turning revenue into profits. To help understand what could be hurting the bottom line, I turned again to Q3 comments which pointed to a spike in costs: Consolidated expenses were $12.1B, up 9 percent from $11B a year ago. The increase primarily reflected higher variable customer engagement costs driven by higher Card Member spending and usage of travel-related benefits, as well as increased marketing investments and operating expenses. Dividend Case: A Very Low Dividend Yield vs Peers, Though Case for Dividend Growth is Good For investors building a dividend-income portfolio, my concern about buying at the current share price is that we are literally getting less than 1% dividend yield. It is not a competitive yield, in my opinion, when compared to some of its peers like Capital One (a major card issuer and bank) and Discover's yield of 1.61%. Data by YCharts In terms of dividend growth, however, Amex has a proven track record of steady dividend growth each year in the last 10 years.   Amex - 10 yr div growth (SA)With such a strong track record of growing dividends, it should provide some foundation for dividend investors to think about this firm, however the indicators that, I think, should contribute to likelihood of \"future\" dividend sustainability and growth are the strong EPS growth expectations. Bear in mind too, that, the firm most of its excess capital return not in the form of dividends but share repurchases, which, I think, is good for supporting the share price but not great for dividend investors, so for some of the reasons mentioned in this section I would not include this stock in my top dividend picks this month, but mostly because it is a low yield.   Amex - capital return / dividends (company data)Essentially, a better yield may occur if the current dividend stays the same and grows, while the share price takes a dip below its average. However, I am not seeing indicators that could lead to that much downside anytime soon, especially as the firm seems committed to supporting its share price through share repurchases. Company Financial Profile: Strong Credit Ratings & Regulatory Capital In this section, I want to give readers a sense of the larger company and its financial viability, and the two indicators I have been using are credit ratings from major agencies as well as debt-to-equity ratios, but also CET1 capital ratios since this firm is in the financial sector. From the company's own website, we can see the credit ratings for the overall firm are stable/positive with \"BBB+\" or better ratings from three major agencies: Moody's, S&P, and Fitch, which, I think, should add confidence to investors concerned about risk:   Amex - credit ratings (company website) As far as the debt-to-equity ratio, Amex is somewhat on the higher end of this comparable peer group I selected. Data by YCharts In terms of CET1, according to the firm's Q3 results, the firm's 10.7% CET1 is well above the regulatory minimum of 7%, another positive sign I want to highlight, as the trend shows it is consistently above that minimum target.   Amex - CET1 ratio (company data Q3)From a holistic view of all these angles I used, a strong CET1 ratio along with strong credit ratings but modestly elevated debt-to-equity is a risk profile I would consider modest at worst. Price and Valuation: Trading at 10-Year High, with Valuation Near or Higher Than Peer Averages Earlier, I mentioned that if you bought into this stock right after my bullish rating a year ago, and held on to it, you are now seeing a +77% capital appreciation, indicating my bullish call was accurate at the time. The chart below is a good visualization of this, as the stock has climbed well past its 200-day SMA and is trading at a 10-year-high now. Data by YChartsOne risk some investors might consider is the limited upside this could pose, trading at such a premium to its price just a year ago. So, to add another angle to this picture, let's talk about some valuation metrics. First, from comparables data we can see the forward P/E vs peers is 4% below the average, so it is practically in line with the peer average it is safe to say.   Amex - PE ratio vs peers (author worksheet & SA data)Considering that Amex, Mastercard, and Capital One all have price/earnings multiples above 15x, I think the market is expecting this subsegment of the financial sector to come in with strong earnings. This matches what the analyst consensus is expecting, which I already touched on earlier. In comparing its forward P/E to the overall sector, though, from SA valuation data we see that Amex is actually overvalued to its sector by +50%. The same is true in comparing its P/B ratio to its sector, which shows massive overvaluation, with Amex having a price/book multiple of 6.8x. I think all the angles in this section I presented, when taken holistically, present this stock as not only trading at a 10-year-high but also not an undervaluation buying opportunity right now. Key Risks Include Bad Loans and Future Recessions In the table and visualization below, I picked 4 risks I think investors should consider with this stock and its sector too, along with the risk weights I assigned. Though this is not an entire list of potential risks, I thought for brevity we should focus on these 4 key items.   risk chart (author worksheet)  risk chart - visualization (author worksheet)This type of business can be impacted by bad loans and credit card charge offs. The good news, from their Q3 commentary, is that \"the third-quarter net write-off rate was 1.9 percent, compared to 1.8 percent a year ago, and down from 2.1 percent in the prior quarter.\" So, we are talking about a charge-off rate of less than 2%. The other risk is that of future recessions impacting consumer spending, and therefore card processing volumes, along with uncertainty of when and how big those future recessions could occur. At the same time, Amex has been in business over 100 years and has proven it can weather through multiple economic recessions over the years. For the time being, data from the International Monetary Fund a few weeks ago points to indicators that global economic \"growth is projected to hold steady at 3.2 percent in 2024 and 2025.\" In another article recently, I mentioned the risk financial firms face with cyberattacks, due to the vast amount of customer data they have, but also the impact on customers if their card info is stolen. This can have a huge reputational cost. Interest rate risk is a lesser factor to consider, but nevertheless is one, and can be impacted by external decisions by the Fed, which are outside the control of Amex. Such rate movements can impact net interest margin, and interest expenses for the firm, which I touched on earlier. We can see from its income statement, for example, that in March 2022 it had interest expenses of $321MM, jumping to $2.1B in Sept 2024. I am hoping that the start of Fed rate cuts will begin to make the cost of borrowing cheaper for this firm. Conclusion: Hold For Additional Gains To summarize, after appreciating 77% since my buy rating last year, this stock is now at a 10-year-high and mostly overvalued. While it has projected revenue and earnings growth, and the upcoming holiday shopping season looks promising for growth in consumer purchasing, Amex is also not among the leading card issuers like Visa and Mastercard. It is also not much of a dividend yield opportunity right now, but it remains a firm with stable regulatory capital and strong credit ratings, along with some diversification in banking and other solutions beyond just credit cards.  So, while some investors may want to take profits off the table and take that 77% gain since my buy rating, the case can be made for waiting some more as the recent bullish market may continue pushing this one up a little further, giving investors an even better exit point if needed. Nevertheless, it does not present a strong \"buy\" case right now at this price and valuation, as it would lead to so much less upside potential vs my original buy rating and so would not be justified.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484749919"}