Expanding Merchant Network And Millennial Focus Will Succeed

Key Takeaways

• Focus on global merchant network expansion and targeting of younger generations drives revenue growth through increased transaction volumes and premium product adoption.
  
• Strong product innovation and SME investment support growth in margins and earnings, with robust credit performance ensuring financial resilience.
  
• Strong U.S. dollar, fintech competition, and growing rewards expenses threaten American Express's revenue growth and margins amidst uncertain economic and regulatory conditions.

Catalysts

Operates as integrated payments company in the United States, Europe, the Middle East and Africa, the Asia Pacific, Australia, New Zealand, Latin America, Canada, the Caribbean, and Internationally.

• American Express is focusing on expanding its merchant network globally, reaching 80% coverage in its top 12 international countries and seeing an 8 percentage point increase in Travel & Entertainment merchant acceptance over the past three years. This should drive higher billed business and revenue growth through increased transaction volumes and acceptance.
  
• The company is successfully targeting Millennials and Gen Z, who are rapidly adopting premium products and are expected to increase their spending as they progress in their careers. American Express is strategically positioned to capture their growing financial needs, which could lead to increased revenue growth.
  
• American Express plans to maintain a robust product refresh strategy, updating between 35 and 50 products annually. This continued innovation enhances their membership model and reinforces premium brand value, likely driving higher net margins and maintaining the appeal of their card offerings.
  
• The company is investing in small and medium-sized enterprise (SME) growth in the U.S. and international markets, where it is underpenetrated. Its unique products and capabilities present an opportunity for significant expansion, likely resulting in increased revenue and earnings from a growing SME customer base.
  
• American Express displays strong credit performance with low delinquency rates and write-offs. Its risk management capabilities and focus on attracting high-credit-quality customers should support stable net margins and contribute to financial resilience, enhancing earnings growth.

American Express Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on American Express compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming American Express's revenue will grow by 11.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 16.4% today to 17.3% in 3 years time.
• The bullish analysts expect earnings to reach $14.7 billion (and earnings per share of $22.56) by about April 2028, up from $10.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from 16.4x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.6x.
• Analysts expect the number of shares outstanding to decline by 2.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

American Express Future Earnings Per Share Growth

Risks

• The strengthening of the U.S. dollar presents a potential headwind to revenue growth for American Express on a global scale, impacting revenue and earnings negatively.
  
• Competition from fintech companies, particularly within the SME sector, could challenge American Express in terms of card acquisition and growth, potentially affecting revenue growth in this segment.
  
• Uncertainty in consumer and business confidence, which has shown fluctuation, could result in slower organic billing growth, thereby impacting overall revenue projections negatively.
  
• Increasing rewards expenses, driven by higher customer engagement and changes in program models, may apply pressure on net margins as operating costs rise.
  
• Uncertain global economic conditions, influenced by tax policies, interest rates, and regulatory changes, pose risks to sustained revenue growth and could impact earnings negatively.

Valuation

• The assumed bullish price target for American Express is $348.0, which represents one standard deviation above the consensus price target of $310.54. This valuation is based on what can be assumed as the expectations of American Express's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $371.0, and the most bearish reporting a price target of just $231.57.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $85.0 billion, earnings will come to $14.7 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $233.68, the bullish analyst price target of $348.0 is 32.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.