American Express Gaps Higher After Topping Q3 Revenue, Earnings Views

Shares of global financial giant American Express NYSE: AXP were trading lower Monday, following Friday's 5.41% gap higher, on the heels of third-quarter results that beat top- and bottom-line views.

Earnings came in at $2.27 per share, up 75% from the year-earlier quarter. According to MarketBeat earnings data, analysts expected $1.80 per share.

Revenue was $11.2 billion, up 22% and topping views of $10.55 billion.

With Friday's rally, American Express cleared a cup-with-handle base above a buy point of $178.80. Shares ended the week at $187.08. Trading volume Friday was 71% higher than average.'

Institutional investors, who were the ones bidding share higher, were pleased with the higher spending on the company's credit cards. As it turned out, fears about constrained spending due to the pandemic's resurgence in the quarter were unwarranted.

The company is now heading back to pre-pandemic levels, with analysts expecting full-year earnings of $9.25 per share, ahead of 2019's earnings of $8.20 per share. It would be a 73% gain over 2020; however, earnings fell to $5.34 per share last year, mostly due to sharply reduced business travel.

Corporate Card Spending Still Lags

In the earnings conference call, chief financial officer Jeff Campbell addressed the current situation with business travel and entertainment. He noted that corporate card spending, which has been primarily for travel and entertainment, showed fewer signs of recovery than other categories.

"We've said all along that we expect this will be the last customer type to see travel recover," Campbell said.

He noted that the T&E category spending was on track with the company's expectations of reaching 80% of 2019 levels in the fourth quarter.

"T&E spending improved sequentially versus Q2 and we're pleased to see restaurant spending, our most resilient and now largest T&E category, back above pre-pandemic levels in the quarter," he said.

Campbell added that American Express saw "modest impacts from the Delta variant in the airline category, where the pace of recovery slowed a bit in August, but it has strengthened again in September and into early October. The trends we have seen reinforce our view. The travel and entertainment spending will eventually fully recover but at varying paces across customer types and geographies."

When it comes to consumer spending, American Express is looking to younger cardholders to drive growth.

CEO Steve Squeri said customer acquisitions gained momentum over the last five quarters, "with 2.6 million new cards in force in the third quarter. Demand for our premium fee-based products has been particularly robust, with acquisitions of our U.S. consumer and small business platinum and gold cards reaching all-time highs in the quarter."

Millennial & Gen Z Customer Growth

He said millennial and Gen Z customers drove this growth, with 75% of new U.S. gold and platinum consumer cards coming from these demographics. He added that those groups showed the most resilience with pandemic-era spending.

Small and medium-sized enterprises were also growth drivers.

"In fact, spending from these groups continued to accelerate in the third quarter, with goods and services spending from SMEs growing 21% above 2019 levels. And overall spending for millennial and Gen Z customers, particularly strong, up 38% over 2019 levels," said Squeri.

So is American Express a buyable stock right now? Certainly, the fundamentals look good, as does the business case.

The pattern cleared last week was the second cup-with-handle of the year. The stock cleared a previous pattern in late April, then ran up 19.4% before pulling into its next correction.

That's right on the cusp of being either a second-stage base or a second first-stage base. In practice, it doesn't really matter; either a first- or second-stage base can be very constructive, as there haven't been repeated pullbacks and breakouts which culminate in institutional investors selling out to take profits.

As of Monday, shares of American Express were up less than 2% from the handle buy point above $178.80. Even in Monday's reversal, the stock has not closed the gap from Friday, so many of the gains are still intact. As long as the stock doesn't climb 5% above the buy point, or, conversely, fall more than a few percentage points beneath that level, it remains in the buy range.