American Express Hiccups After Earnings, Time To Buy?

Key Points

• American Express stock is trading lower after its earnings report, despite posting optimistic growth rates and record quarterly volume. Is there a disconnect here that value investors can take advantage of?
• The superior moat around the business model offsets these potential risks, calming some investor worries.
• Missed expectations? Sure, increased management guidance? Absolutely. These valuation metrics and outlooks can reassure investors that the whole market is cheering for a new run in the stock.

Shares of the credit card and services giant American Express NYSE: AXP are trading lower by as much as 5.5% during Friday's trading session, scaring some investors and exciting some as well; patient value investors need to decide which side of the emotional spectrum they will fall on today. 

Markets may be reacting in this negative shade due to the company missing some revenue expectations; however, when investors eat away at the meat within the earnings presentation, the truth of the actual results can help them land on the excited edge rather than the panic edge.

Hi, My Name is American Express

Getting to know the stock before making assumptions is critical for investors - and traders - who are on the fence about a potential purchase, whether for the long-term or the short-term. Considering that the stock reached an all-time high not too long ago (first half of 2022), marking the classic Wall Street definition of a 'Bear Market' can help determine some buying levels, especially after today's decline.

The stock reached an all-time high price of $199.55. Thus a 20% decline from this level (the definition of a bear market) can become a sensible first target for investors to consider buying after some more due diligence. The price of $159.64, rounded up to an even $160 per share, can be the initial and perhaps the last support level for accumulations.

Considering that stocks go down faster than they tend to go up, investors could see this massive support level sooner than later, so they better prepare by arming themselves with the correct information. With American Express's earnings release, bulls can begin to cancel out cries from bears around a 'missed' revenue expectation.

According to Bloomberg, analysts were expecting volumes for the company's network to reach $441.6 billion. Management reported a figure shy of expectations at $426.6 billion, a quarterly record for the firm despite the media's focus on an expectations miss.

Breaking down the growth drivers in the business and the growth rates over the past twelve months can help investors - and potential investors - understand why today's reaction is severely disconnected from reality. Even analysts can be critiqued for being over-conservative in the price targets they are laying out today.

Buy the Hiccup? Check this First

Net revenue for the company grew by a staggering 12% over the past year; how many companies can say this when their market capitalization (stock price multiplied by the number of shares) is over $130 billion? That's right, only a few. Companies of all sorts typically slow down their growth across the board once they reach a specific size, not Amex.

The company did increase its provision for credit losses expense, which can be seen as a warning sign of a weakening consumer. A 192% increase in this provision account can worry some investors. However, as was mentioned, American Express reported record volume to offset these viewpoints.

This quarter's volume growth has been the slowest in the past year, going from 28% a year ago to only 9% today. However, development of any kind today should be valued at a higher multiple since there are many questioning dynamics around whether the economy will fall into a new recession. 

As always, the point is this; total loans are at a three-year high for Amex, and with a rising interest rate environment thanks to the United States FED, NII (Net Interest Income) is set to rise to mouthwatering levels. Management is getting ahead of the curb by providing optimistic guidance for 2023, and markets agree.

Revenue is set to grow at another 15% to 17% clip, again a massive feat for a company this big. Earnings per share are expected to fall between the $11.0 to $11.4 range, equating an 11.6% to a 15.7% annual growth rate. As seen in the stock's forward price-to-earnings ratio, markets are having difficulty showing their excitement toward these growth rate expectations.

American Express trades at a 14.3x forward P/E, while competitors like Capital One Financial NYSE: COF and Discover Financial Services NYSE: DFS trade at inferior valuations of 8.3x and 7.4x, respectively. This means that the broader market is placing a higher perceived value on the future perceived earnings of American Express over competitors. If this is not a sign of favoritism and preference, investors may be disappointed.