American Express Customers Continue to Pay for the Privilege

American Express (NYSE:AXP) is continuing to build on its stellar 2019. Over the past 12 months, AMEX stock is up over 31%. In the first weeks of 2020, the stock is up almost 7%. The latest earnings report should do nothing to blunt the stock’s momentum.

 On January 24, the company delivered an earnings report that beat analysts’ expectations on the top line and bottom line. The company reported earnings of $2.03 per share which beat a Refinitiv forecast of $2.01 per share. Revenue was largely in-line with expectations posting a narrow beat of $11.365 billion as opposed to the $11.36 billion that was forecast.

Adjusted annual profit was up 12% from 2018 at $8.30 per share. Looking forward, the company is expecting profits to range between $8.85 and $9.25 per share. That is tightening the range that analysts polled by Refinitiv have which is for profit between $8.49 and $9.67 per share. American Express also forecast revenue to grow between 8%-10%.

That last piece of guidance is significant because despite their positive earnings in October, the company’s stock took a brief tumble due to a cautious growth outlook.

The American Express name appears to retain its cache

The strength of the report was in AMEX’s net card fees which exceeded estimates by $0.03 billion ($1.08 billion vs. $1.05 billion). At 17% growth, card fees were the company’s fastest-growing revenue item in 2019. On the conference call after the earnings report was released, AMEX management projected this trend would continue.

“These results demonstrate the success of our strategy to generate sustainable, profitable growth across the enterprise over the long term,” said AMEX CEO Stephen Squeri in a statement. The company added 11.5 million new proprietary cards in 2019. Nearly 70% of these new cardmembers chose the company’s fee-based products.

The credit card industry has largely become a case of monkey see, monkey do. It’s to the point where, for those with credit, the credit card products themselves are commodities. Each card is following a similar playbook to attract customers (cashback on purchases, frequent flier miles, rewards programs, etc.). But investing in these incentives is a drain on capital. This creates a dynamic in which companies have to wonder if the juice is worth the squeeze. But not having such incentives would put them at a competitive disadvantage.

That’s where American Express has stood out and continues to stand out. For many years, an American Express was only available as a commercial product. Businesses were content to pay the annual fee because “membership had its privileges”. And make no mistake about it, American Express has no plans to move away from their core consumer.

As more competitors like JPMorgan Chase (NYSE:JPM) have aggressively moved in on the commercial turf, American Express has had to adapt. One way they have done so is to offer the card directly to consumers. This isn’t new; American Express has been doing this for years. However, the latest earnings report indicates that consumers are still willing to pay that annual fee.

The future of AMEX will depend on how they adapt to digital

American Express has a history of exceeding analysts’ expectations. This report makes it 7 out of 8 quarters the company has delivered earnings that exceeded the consensus estimate. However, the largest threat to the company’s growth is not really a slowdown in consumer spending, but an increase in consumer expectations regarding technology and in particular security.

“There are tons of challenges facing card providers these days,” says Cyndie Martini, chief executive officer at Member Access Processing, the largest aggregator of card services for credit unions in the U.S.

And, according to Martini, foremost among those challenges is the rise of digital payment technology. Fintech companies such as PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) are crossing over into areas that are typically reserved for traditional banks. But they are also challenging credit card issuers like AMEX by forcing the companies to make a continual investment in innovative technologies which is a huge investment that ultimately eats into the profits of these companies.

Is AMEX a good buy right now?

American Express looks like a good buy for the foreseeable future. The challenges the company faces are not unique to AMEX. And the company is taking steps to migrate to a digital payment platform.

Plus, the company continues to require high standards for membership. This means that AMEX customers have a higher net worth than other card providers. This makes the stock a bit more recession-proof than others. And if those individuals continue to be willing to pay that annual fee, the company will enjoy a reliable revenue stream no matter which way the economy goes.