At $ 172, American Express stock has drawbacks

[Updated 07/13/2021] American Express Rating Update

American Express shares (NYSE: AXP) has gained around 42% year-to-date, rising from around $ 121 at the start of 2021 to around $ 172 currently, significantly ahead of the S & P500, which has advanced 16% during the same. period. Trefis estimates American Express valuation at about $ 152 per share, which is 12% below the current market price. The rise in stocks in recent months was due, in general, to positive investor sentiment towards US financial stocks, thanks to the approval of the $ 1.9 trillion stimulus package and the rapid pace of the vaccination program against Covid-19.

American Express achieved full-year 2020 revenue of $ 36.1 billion, down 17% year-on-year. This is explained by lower discount commissions, lower transaction volumes and negative growth in outstanding loans. Transaction volumes and outstanding loans were negatively affected by the drop in consumer spending during the year, which suffered from the Covid-19 crisis and the economic slowdown. Additionally, the restrictions related to Covid-19 had a direct impact on the hospitality industry and airline operations, which again impacted the company’s bottom line.

The company posted better-than-expected profits in the first quarter of 2021, while its revenue missed the target. It reported revenue of $ 9.06 billion, down 12% from the previous year. This could be attributed to a 9% year-over-year decline in non-interest income coupled with a 21% decline in net interest income. While the NII suffered from a lower interest rate environment and a decline in outstanding loans, non-interest income declined due to lower consumer spending and a decline. lower average discount rate. That said, the company’s adjusted net income fell from $ 333 million a year ago to $ 2.2 billion in the quarter. This is explained by a favorable decrease in provisions for credit losses from $ 2.6 billion to – $ 675 million.

Going forward, we expect NII to continue to suffer in FY2021, due to falling interest rates, which should not see an immediate return to pre-Covid-19 levels. . That said, consumer spending levels are expected to pick up in the current year, benefiting both transaction volumes and outstanding loans. Overall, American Express revenues is expected to remain around $ 38.2 billion in fiscal 2021. Additionally, the company’s adjusted net profit is expected to remain around $ 5.7 billion during the year, or nearly 90% above the 2020 figure. This will likely result in EPS of $ 7.26, which when paired with a P / E multiple of nearly 21x, will lead to a valuation of $ 152.

[Updated 02/05/2021] American Express stock is trading near fair value

After gaining over 80% from the lows of March 23 of last year, we believe American Express shares (NYSE: AXP) has limited upside potential. Trefis estimates American Express review at about $ 130 per share – about 5% above the current market price. American Express is a global financial services company, providing payment and credit card products, as well as travel-related services to consumers and businesses around the world. As the company beat consensus estimates in its recently released fourth quarter results, revenue fell 18% year-on-year to $ 9.35 billion. This could be attributed to an 18% year-over-year decline in non-interest income due to lower consumer spending and a lower discount rate, followed by a 17% decline in income. net of interest.

American Express is the third largest player in card transaction volume in the United States and derives the majority of its revenue from remittance fees – approximately 57% in 2020. Fees are charged as a percentage of card transactions that take place with merchants partners. Therefore, the company is very sensitive to changes in the consumption habits of consumers. Due to the Covid-19 crisis, levels of consumer spending have plummeted, hurting American Express revenue. In addition, the company has co-branded card agreements with several hotel chains and airlines. Hotel occupancy rates and the global travel industry have been directly affected by the coronavirus outbreak. Overall, the above factors negatively impacted American Express’s revenue outlook in 2020, limiting the figure to $ 36.1 billion, a decline of 17%. That said, consumer spending levels have seen some recovery in recent quarters. In addition, the massive availability of the Covid-19 vaccine and improving economic conditions over the coming months are likely to increase card transaction volumes. It is likely to benefit the turnover of the company, allowing American Express revenues reach $ 40 billion in fiscal 2021.

Operating expenses as a percentage of revenue increased from 72.4% in 2019 to 75% in 2020. In addition, the company increased its provisions for credit losses to $ 4.7 billion for the entire period. year 2020, compared to $ 3.6 billion during the period of the previous year. . As a result, adjusted net income took a 54% hit on an annual basis, reducing EPS to $ 3.77. However, as the economy normalizes, provisions for bad debt are expected to decline somewhat. Additionally, American Express is expected to begin its share repurchase program in the first quarter of 2021. This will likely allow the EPS figure to hit $ 6.84 in fiscal 2021. Overall, the coupled EPS of $ 6.84 at a P / E multiple just below 19x will lead to a valuation of around $ 130.

[Updated 08/06/2020] American Express stock has gained 38% in recent months, is that still attractive?

American Express shares (NYSE: AXP) lost more than 44% – from $ 123 at the end of 2019 to around $ 69 at the end of March – then has climbed 38% to around $ 95 now. This implies that it is still 23% lower than at the start of the year.

This can be attributed to 2 factors: The Covid-19 epidemic and the economic downturn have resulted in lower market expectations for 2020 and short-term consumer demand. This could negatively affect the company’s results due to a significant drop in card spending on travel, hotels and other discretionary items, coupled with increased exposure to potential defaults. The multi-billion dollar stimulus from the Fed provided a floor, and the rally in equities owes a lot to it.

But that’s not the end of the story for American Express stock

Trefis estimates American Express valuation at around $ 104 per share – around 10% above the current market price – based on an upcoming trigger explained below and a risk factor.

The trigger is an improved trajectory for American Express revenues over the second half of the year. We expect the company to report 2020 revenue of $ 36.7 billion, about 16% below the 2019 figure. Our forecast stems from our belief that the economy should open up. in the third trimester. The easing of foreclosure restrictions in most countries around the world is expected to help consumer demand, leading to increased spending. The company has co-branded card agreements with several hotel chains and airlines, for example Delta Air Lines, Marriott International, British Airways, Hilton Worldwide Holdings, etc. In addition, American Express derives approximately 80% of its revenue from commissions collected. as a% of the volume of card transactions. As travel restrictions are relaxed and transaction volume increases in the coming months, the credit card giant is expected to see revenue improve. Overall, we see the company reporting EPS of around $ 3.13 for fiscal 2020.

After that, American Express revenue is expected to improve to $ 40.7 billion in fiscal 2021, primarily due to higher discretionary consumer spending on travel, hotels and other items. In addition, the net profit margin is expected to improve year over year due to lower provisions for credit losses, leading to EPS of $ 6.66 for fiscal 2021.

Finally, how much should the market pay per dollar of American Express profit? Well, to make almost $ 6.66 a year from a bank today, you would have to deposit around $ 725 into a savings account, which is around 110 times the desired earnings. At the current American Express share price of around $ 95, we’re talking about a P / E multiple of around 14x. And we think a figure closer to 16x will be appropriate.

That said, consumer credit is a risky business right now. Growth looks less promising and the short-term outlook is less than optimistic. What is behind this?

American Express is the third largest player in terms of card transaction volumes in the United States. In addition, it has a large portfolio of consumer and commercial card loans – approximately $ 83 billion in fiscal 2019. The economic downturn could negatively affect the loan repayment capacity of its consumers, exposing the company with significant defaults. As a result of this exposure, American Express increased its loan loss provisions to approximately $ 4.2 billion by the second quarter of 2020, approximately 2.5 times more than a year ago, resulting in a huge increase in total expenses for the year. If the economic situation deteriorates, this figure could increase further in the following months.

The same trend is visible through American Express’ peer – A capital letter. Its revenues are expected to suffer in fiscal 2020 due to lower consumer spending. In addition, its margins are expected to decline due to the provision for credit losses in anticipation of bad debts. This would explain why Capital One’s stock is currently priced at $ 65 but appears to be expected to have EPS of around $ 7.20 in fiscal 2021.

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