Last week, American Express Company AXP reported strong second-quarter 2024 earnings, driven by increased card member spending, fee growth, rising net interest income, and a growing Gen-Z and Millennial customer base. Moreover, AmEx increased its 2024 earnings guidance, reflecting resiliency in its core business prospects despite a softer spending growth environment.Top of Form
Before delving into the underlying reasons for the improved outlook and addressing the critical question of how investors should strategically position themselves regarding the stock, let’s first review the second-quarter results.
Profit Growth
On Jul 19, AmEx, carrying a Zacks Rank #3 (Hold), reported second-quarter 2024 earnings per share of $3.49, which beat the Zacks Consensus Estimate by 8.4%. The bottom line climbed 20.8% year over year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Also, this company, belonging to the Financial Miscellaneous Services industry, reported top-line growth of 8.5% year over year in the second quarter. These results underscore a robust performance across most of the segments. For a detailed analysis, please read our blog on second-quarter earnings: AmEx Beats on Q2 Earnings Estimates, Ups '24 EPS View.
Factors Favoring AmEx Stock
Loyal Customer Base: AmEx benefits from a loyal customer base coupled with high levels of new card acquisitions and solid retention levels. Despite the current soft-spending growth concerns, the company expects its premium customer base to continue driving its card fee revenue growth, which came in at 15% in the second quarter of 2024. The company’s premium services bode well as it continues to maintain its moat in the market and attract new customers.
AmEx's strategic focus on enhancing value propositions and expanding product offerings further solidifies its position as a preferred choice among consumers. Its U.S. Consumer Services billed business growth in large part comes from Millennials and Gen-Z customers, as shown in the chart below:
Image Source: AXP 2Q24 Earnings Presentation
It seems like the company will focus on this category to maintain steady billed business growth in a soft-spend environment by offering lucrative rewards and improving engagement. However, the credit quality associated with younger-generation card loans needs to be kept in check.
Continued Investments and Partnerships: The company continues to invest in product innovations, marketing and technology, amongst others, to stay relevant and refine its offerings. The company expects to spend 15% more on marketing compared with the last year in a bid to leverage the growing demand for its products. This move will enable AXP to acquire more cardholders and improve its spending prospects in the medium to long term.
An achievement of AXP in this quarter was that all its marketing expenses would be funded organically and not from the Accertify gain on the sale. This highlights the strength of AXP’s underlying business. Moreover, an increased marketing spend will help AXP expand its market share. The company continues to refresh its products in a bid to add value to its premium card products. Partnerships also aid AXP to expand its footprint and lead to improved customer engagement.
AmEx’s continued efforts to sustain its top-and-bottom-line growth is reflected in its share price performance, through positive investor sentiment about the prospects of this stock.
First Half Price Performance
Image Source: Zacks Investment Research
In the first half of 2024, AXP rallied 23.6%, outperforming the industry’s growth of 0.8%. It also outperformed Euronet Worldwide, Inc. EEFT, Mastercard Incorporated MA and Visa Inc. V, which gained 2%, 3.4% and 0.8%, respectively.
Estimate Revision Favoring the Stock
Analysts seem to be bullish about AmEx’s prospects. AXP’s 2024 earnings have witnessed four upward estimate revisions against none in the opposite direction during the past seven days. The Zacks Consensus Estimate for 2024 earnings has improved 16 cents at the same time. Similarly, the consensus mark for 2025 witnessed two upward revisions against one in the opposite direction during the seven days. The consensus mark improved 1 cent in the same time frame.
Image Source: Zacks Investment Research
What Could Hurt AmEx Growth Plans?
One of the major expenses of AXP is its card member rewards. It rewards cardholders with lucrative offers in a bid to lure them to spend more, which will increase the discount revenues of AXP. The metric rose 6.9% in the second quarter of 2024. Further rise in card member rewards might hamper AXP’s bottom line in the future.
Card Member services expenses increased 22% year over year in the second quarter of 2024. A higher usage of travel-related benefits might further increase this expense in the future.
From a valuation perspective, AXP is trading at a premium compared to the industry’s average. The company's shares are currently priced at a forward price/earnings ratio of 17.55X, which is higher than the median value of 15.54% and the industry’s average of 13.96X.
Image Source: Zacks Investment Research
Final Thoughts
Considering AXP’s initiatives to increase market share and boost top-line growth, like an increase in marketing expenses and enhancing offerings, we believe it may offer substantial upside potential from the current levels. Hence, it might not be opportune to consider profit-taking at this juncture. This stance highlights confidence in AXP’s long-term prospects despite an expected slower spending growth environment. Furthermore, its premium valuation signals investors to wait for a better entry point.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
