Investment Demands And Credit Concerns Will Drive Mixed Future Results

Key Takeaways

• Increased marketing and technology investments may pressure net margins if they don't boost revenue proportionally.
  
• Economic uncertainties and competition in the premium segment could hinder sustained revenue growth and impact earnings.
  
• Focus on customer value propositions, premium products, and international growth could drive sustained revenue and earnings growth with stable profit margins.

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 facing potential headwinds from the need for significantly increased investment in marketing and technology to drive growth, which could pressure its net margins if these investments don’t yield proportional revenue increases.\n\n
• The company's expectation of continued high levels of new card acquisitions and product refreshes presents a risk if new competitors or traditional players more aggressively target the premium segment, potentially impacting American Express’s ability to sustain revenue growth at the current pace.\n\n
• The anticipated upward trend in credit reserve and write-off rates due to the acquisition of new customers and increased lending may pressure net income if loan and credit quality do not remain stable.\n\n
• Economic uncertainties, such as potential changes in tax policy, interest rates, and currency movements, present risks that could negatively impact revenue if adverse conditions arise more than expected.\n\n
• The guidance provided assumes sustained consumer confidence and SME growth, and any decline in these areas, potentially due to macroeconomic factors, could result in revenue falling below expected growth predictions, thus impacting earnings.

American Express Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on American Express compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming American Express's revenue will grow by 9.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 16.4% today to 15.7% in 3 years time.
• The bearish analysts expect earnings to reach $12.4 billion (and earnings per share of $18.53) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, down from 18.4x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.1x.
• 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 7.33%, as per the Simply Wall St company report.

American Express Future Earnings Per Share Growth

Risks

• American Express achieved record revenues of $66 billion, up 10%, with a record net income of $10 billion and a 25% increase in earnings per share, suggesting strong revenue and earnings potential.
  
• The company added 13 million new card acquisitions and saw high Card Member retention, best-in-class credit performance, and disciplined expense management, which could drive further revenue and stable profit margins.
  
• There is a sustained growth opportunity in the international business with a strong increase in international spend and under-penetration in consumer and SME markets, potentially boosting revenue.
  
• American Express's strategy of investing in customer value propositions, marketing, technology, and talent is showing clear results, potentially leading to sustained revenue growth and improved net margins.
  
• The company's focus on premium products, particularly attracting Millennials and Gen Z consumers, could lead to increased card spending and revenue growth, as these customer segments are expected to expand their spending needs over time.

Valuation

• The assumed bearish price target for American Express is $254.6, which represents one standard deviation below the consensus price target of $298.28. 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 more bearish 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 $230.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $78.7 billion, earnings will come to $12.4 billion, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $262.36, the bearish analyst price target of $254.6 is 3.0% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.