In an era where millennials and gen Z consumers are swiftly becoming economic powerhouses, American Express Co. (AXP, Financial) shines, brilliantly capturing their loyalty and spending power.
With an innovative approach, the company recorded a stunning 18% year-over-year spending surge from these generations in the third quarter, leading to over 60% of its new global consumer accounts.
This success is not just about understanding the now; it is about foreseeing the future. As these consumers grow financially, their evolving needs and preferences keep American Express at the forefront – a testament to its adaptability and strategic foresight.
Young customer base
American Express has captured the attention and loyalty of millennials and so-called "zoomers," a demographic rapidly becoming the cornerstone of its customer base. The company's tailored approach and innovative offerings have resonated with these younger generations, contributing significantly to its growth. For instance, during the third quarter in the U.S., spending by millennials and gen Z consumers surged by a remarkable 18% year over year. Further, more than 60% of all new consumer account acquisitions globally in a single quarter were attributed to these demographics.
Fundamentally, the ability to engage and retain these customers represents American Express' adaptability and forward-thinking strategies. As these younger generations age and develop their disposable income, they will likely remain beneficial to the brand, translating into a long-term and expanding customer base. By focusing on these customers' unique needs and preferences, the company should retain continued relevance and growth.
Source: Bloomberg
Excelling in credit quality with stellar risk management
On the credit quality side, American Express' focus on maintaining a high-quality customer base is a key pillar of its growth strategy. Delinquency and write-off rates for card member loans and receivables have remained steady and below pre-pandemic levels.
In essence, American Express has effectively managed credit risk with a 30-plus days past due rate of only 1.2%, below the pre-pandemic level of 1.5%. The net write-off rate of 1.8% is also below the pre-pandemic level of 2.2%. These metrics indicate American Express has successfully kept credit losses low, which is crucial for profitability and risk management.
Source: Third-quarter 2023 earnings presentation
On the other hand, the 33% year-over-year growth in net interest income is impressive. It indicates that American Express has effectively managed its interest-earning assets, which include card member loans.
While the year-over-year growth of 13% in net interest expense decelerated compared to the second quarter, it is still a positive growth rate. American Express' ability to manage interest expenses is crucial for its profitability and margins. Lower interest expenses enable it to keep more interest income, contributing to its bottom line. These favorable credit metrics represent a crucial strength that supports American Express' lending operations and overall business model.
Finally, American Express maintains a strong capital position, exemplified by its CET1 ratio, within the 10% to 11% range. A strong capital position allows the company to weather economic uncertainties, invest in strategic initiatives and maintain shareholder confidence. The ratio is well above regulatory minimums, highlighting financial stability. Overall, the company has maintained strong credit quality despite fluctuations in the economic environment.
Solid performance with growing cardholder base and network volumes
On the performance side, while net card fee growth decelerated to 19% from 22% in the previous quarter, maintaining robust fee income is a strength. The acquisition of new card members is essential for future growth. Although the number of proprietary new cards acquired dropped slightly, it is important to understand this can fluctuate due to market dynamics, competitive pressures and marketing strategies.
A strong foundation of cardholders remains crucial. The 6% growth in card member receivables and 20% growth in total loans reflect American Express' prudent approach to lending. The company has grown its lending portfolio while maintaining strong credit quality.
Additionally, American Express reported 6% year-over-year growth in total network volumes. This metric encompasses all transactions processed through its network, representing various activities, including card member spending, merchant services and more. This growth signifies the company's capacity to attract and retain customers who actively use their American Express cards for a number of different transactions.
Source: Third-quarter 2023 earnings presentation
Further, the 7% year-over-year growth in billed business is a critical performance indicator for American Express. It comprises transactions made using American Express cards, indicating a substantial increase in cardholder usage for various purchases and expenditures.
The 6% growth in goods and services-billed business is also a positive sign, demonstrating that consumers are using their cards for more than just retail purchases; they also rely on them for various services, including travel, dining and entertainment. With 13% growth recorded in travel and entertainment-billed business, American Express experienced a noteworthy rebound in these sectors post-pandemic. The travel and entertainment spending recovery shows the company's strength in these categories.
Additionally, the 9% growth in U.S. consumer services billed business reflects a strong performance in the domestic market. This growth indicates that American Express has succeeded in attracting and retaining individual consumers as customers. While the segment showed only 1% year-over-year growth, it is important to note that it covers small and mid-size enterprises and large global corporations.
Maintaining stable business volumes in this segment suggests American Express has maintained its corporate clientele, which can be highly lucrative. The 15% year-over-year growth in international card services billed business highlights its global appeal and showcases a robust performance in the international market, covering both consumers and corporate clients.
Looking toward 2024, American Express' outlook for revenue growth over 10% and mid-teens earnings per share growth is ambitious and significant. These targets provide clear guidance that the company has a well-defined strategy for future growth. It is about managing the present well and positioning the company for rapid expansion in the coming years.
Growth with dynamic membership model and Formula 1 partnership
American Express has developed a unique membership model that acts as a powerful engine for growth. The company leverages this model to attract premium customers, enhance retention rates, deepen customer engagement and expand its network of merchants and partners.
The membership model has allowed the comapny to acquire more than 70% of new accounts in a single quarter as fee-based products. The model has proven to be an effective driver of revenue growth, catering to many customer segments, deepening customer engagement and attracting premium customers. Fee-based products, a key component of the model, contributed significantly to revenue, underscoring the value of membership.
In addition to the membership model, American Express' entry into the sports vertical, specifically as the official payments partner of Formula 1 in the Americas, represents a strategic move to tap into the rapidly growing popularity of F1 racing. The partnership marks the company's first new sports vertical in over a decade and it aims to capitalize on the surging interest in Formula 1 racing worldwide.
The partnership also introduces a new growth avenue for American Express. As Formula 1 racing garners increasing attention globally, this strategic collaboration provides the company with opportunities to tap into the enthusiasm of racing fans. Therefore, this initiative aligns with the company's focus on delivering generational relevance and expanding its value proposition.
Source: formulapedia
Valuation and technical take
The stock of American Express is currently moving with a forward price-earnings ratio of around 13, suggesting an undervaluation from its five-year average. However, the stock price has become highly correlated with inflation and wage growth since the market bottom in 2020.
Wage growth and U.S. inflation pace directly impact key performance metrics such as transaction volume, spending patterns and loans and receivables (balance outstanding) for American Express. Similarly, high interest rates critically influence net interest income.
Source: tradingview.com
Conclusion
In a high inflationary environment, the Federal Reserve's longer-term stance may continue to benefit the company's market valuation over the mid-to-long term. However, the quality of credit metrics for American Express may serve as one of the most critical factors influencing the stock price. Any deterioration in credit quality will adversely impact the share price.
