American Express (AXP): A Bullish Outlook Driven by Young Customers and Rising Profit Margins

This report aims to provide an in-depth analysis of American Express (NYSE: AXP) to determine whether it is the best credit card stock to invest in as of September 2024. The analysis will focus on the company’s young customer base, rising profit margins, and overall market performance. By examining various aspects such as financial metrics, market share, consumer behavior, and competitive positioning, this report will offer a comprehensive view of American Express’s current standing and future prospects.

Introduction

Young Customer Base

Demographic Shifts

American Express has successfully attracted a younger demographic, particularly millennials and Gen-Z consumers. According to recent data, millennials and Gen-Z account for 33% of total spending on Amex cards, with a 13% year-over-year growth. Additionally, 60% of new Amex accounts were opened by these younger generations, indicating a strategic focus on capturing this valuable market segment.

Spending Behavior

The spending behavior of younger consumers is also noteworthy. Gen-Z, in particular, is more likely than millennials to make online purchases from creators, suggesting a shift in consumer behavior towards digital and social commerce. This trend aligns well with Amex’s efforts to enhance its digital offerings and partnerships with online platforms, thereby catering to the evolving preferences of younger consumers.

Lifetime Value

The CEO of American Express has emphasized the importance of targeting young consumers, noting that younger cardholders have a “huge” lifetime value for the company. This focus on long-term customer relationships is crucial for sustained growth, as younger consumers are likely to continue using Amex products and services as they progress through different life stages.

Rising Profit Margins

Financial Performance

American Express has demonstrated strong financial performance in recent quarters. In Q2 2024, the company reported a net profit margin of 20%, representing a year-over-year increase of 27.5%. While this margin is lower than its competitors, Visa and Mastercard, which maintain profit margins above 50% and 40%, respectively, Amex has more room for growth in its margins. This suggests that American Express could potentially increase its profit margin from 20% to 30% more easily than Visa could increase from 55% to 60%.

Revenue and Earnings Growth

The company’s revenue and earnings growth further underscore its financial health. From 2013 to 2023, Amex experienced an 84% increase in revenue and a 130% rise in diluted earnings per share (EPS). For 2024, executives predict revenue and EPS to rise by double-digit percentages, driven by the addition of new card members, especially from younger demographics.

Market Sentiment

Market sentiment towards American Express has been generally positive, with the stock showing a year-to-date increase of +31.47% as of September 2024. Analysts from Smartkarma have given the company high scores in Growth (4), Resilience (4), and Momentum (4), leading to an overall Smart Score of 3.2. This positive sentiment is further supported by institutional interest, with significant holdings by Legal General Group and Bank of Montreal.

Competitive Positioning

Market Share

As of 2024, American Express holds a credit card market share of 19.60% based on purchase volume and 13% in terms of outstanding balance. The company has 56 million cards in circulation, giving it a market share of 7.4% in that category. The average annual spending on American Express cards is notably high at $15,904, which translates to an average monthly spending of $1,325. These figures highlight Amex’s strong market presence and consumer loyalty.

Comparison with Competitors

When compared to its main competitors, Capital One Financial and Discover Financial Services, American Express shows stronger revenue, net income, and profitability metrics. For instance, Amex’s revenue stands at $63.16 billion, with a net income of $8.37 billion and an EPS of $12.14. In contrast, Capital One Financial has a revenue of $49.48 billion and a net income of $4.89 billion, while Discover Financial Services has a revenue of $20.61 billion.

Analyst Ratings

The consensus outlook for American Express stock in 2024 is mixed, with a consensus rating of “Hold” based on 26 Wall Street analysts. The average twelve-month stock price forecast is $230.70, representing a downside of approximately 6.01% from the current price of $245.46. However, the highest price target among analysts is $285.00, indicating potential for significant upside.

Challenges and Risks

Consumer Spending Environment

Despite the positive indicators, American Express faces challenges in the current consumer spending environment. Analysts from Bank of America Securities have downgraded Amex from “buy” to “neutral,” citing concerns about subdued billings volume growth and a challenging consumer spending environment, even among high-end consumers. Recent commentary from retailers and travel companies indicates a difficult spending backdrop, as evidenced by a 4% year-over-year decline in travel spending in July 2024.

Valuation Concerns

Another point of concern is the company’s high valuation. American Express is trading at a forward PE of 15.5x, which some analysts consider expensive compared to historical levels. Elevated marketing expenses to maintain consumer spending levels are also a point of concern, potentially impacting profit margins in the short term.

Rising Charge-Offs and Delinquencies

There are also concerns regarding rising charge-offs and delinquencies in the banking sector. American Express’s net write-off rate on card member loans stands at 2.1%, which, while manageable, requires close monitoring. The company has raised its 2024 EPS forecast to $13.55, up from $12.90, but investors should remain vigilant about consumer credit performance.

Strategic Initiatives

Digital Transformation

American Express has been proactive in its digital transformation efforts, leveraging extensive customer data to manage risk and enhance customer experiences. The company utilizes real-time data and third-party information to evaluate transactions, providing flexibility in extending credit. This focus on digital innovation is crucial for staying competitive in an increasingly digital financial landscape.

Expansion and Partnerships

The company’s strategic moves, including expanding into Africa and partnerships like Flutterwave accepting Amex cards in Nigeria, further bolster its growth potential. These initiatives not only diversify Amex’s revenue streams but also enhance its global footprint, positioning the company for long-term success.

Focus on High-Income Consumers

American Express continues to cater primarily to higher-income customers, who are generally more resilient during economic downturns. This focus on affluent consumers provides a stable revenue base and mitigates risks associated with economic volatility.

Conclusion

In conclusion, American Express (NYSE: AXP) presents a compelling investment opportunity in 2024, driven by its growing young customer base and rising profit margins. The company’s strong financial performance, strategic initiatives, and competitive positioning underscore its potential for sustained growth. While there are challenges and risks, such as a challenging consumer spending environment and valuation concerns, the overall outlook remains bullish.

American Express’s ability to attract and retain younger consumers, coupled with its focus on digital transformation and high-income customers, positions it well for future success. Investors should consider these factors when evaluating Amex as a potential addition to their portfolios. Given the current market conditions and the company’s strategic direction, American Express stands out as a strong contender for the best credit card stock in 2024.