To The Moon

$American Express(AXP)$ initially fell 6% after its April 20th earnings report, but managed to pull back and only ended up dropping 1.01% despite the overall poor market performance.

This is worth noting for investors as American Express has always been an important holding of Warren Buffett's Berkshire Hathaway (BRK.B), consistently ranking in the top five over the past few quarters. While Buffett reduced his holdings in several bank stocks during Q3-Q4 of 2022, even completely selling off some, he maintained a heavy position in AXP. This indicates that when it comes to financial sectors, the Oracle of Omaha is far more optimistic about consumer finance than banking.

Q1 performance review

Revenue was $14.28 billion with a YoY increase of 21.6%, surpassing Q4's $14.18 billion from "Christmas + Shopping Season '22" and exceeding market expectations at $14.03 billion; however, EPS was $2.40 which was lower than expected at $2.68 due mainly to credit loss reserves totaling $1.06 billion which exceeded expectations at $0.89 billion.

Additionally, AXP issued 3.4 million new cards during Q1 with total credit card member loan balances reaching $109.1 billion slightly above expectations at $108.eighty-eighty-three-billion dollars; guidance-wise, the company still expects full-year revenue growth between 15-17%; full-year EPS between eleven and eleven point four dollars per share both exceeding expectations.

As a retail deposit-dominant company rather than commercial deposits-based one with relatively low uninsured deposit scale compared to regional banks' liquidity crisis relationship before this type of consumer finance companies like AXP are still relatively well-positioned without much exposure risk on commercial real estate side either compared to US regional banks.

Visa (V) and Mastercard (MA) also reported strong earnings.

Trading strategy

After the financial report, i prefer a Sell PUT.

The credit loss reserve is to prevent money from being advanced for bad debts in advance. If this part was calculated today but did not happen, it would still return to profits. This is why AXP's financial reports have a significant impact and can continue throughout the quarter.

Despite falling 6% after hours, AXP showed strong resilience with large buyers purchasing back shares indicating that the market believes Q1 provisions were somewhat conservative.

Currently, US residents' deposit rates are declining due to high inflation while loan default rates are rising; therefore, making some provisions as a precautionary measure by companies like AXP is understandable. However, currently most of the increase in default rate comes from two areas: commercial real estate loans and households that stopped subsidies after the epidemic and could not make ends meet due to increased mortgage payments. Previously, CICC's report mentioned that the decline in resident deposits mainly came from lower-income residents while higher-income earners and most middle-class people still have relatively abundant savings which also fits well with current situation where layoffs are frequent but business activities remain strong.

Personally speaking, I am relatively optimistic about AXP's Q2 financial report while also acknowledging market sentiment towards "conservative company provisions." Considering that there is currently greater downward pressure on US stock markets and an over 80% chance of interest rate hikes in May, setting prices slightly below current levels for PUT options may be wise such as selling 150 PUTs expiring on May 26th which has a margin requirement of around $2000 USD with potential returns of $100 USD at expiration date.

While this investment output ratio may not be very high alone it includes expectations for building positions within certain ranges around $150 per share during this quarter which would still be quite good.