Airline Challenges Will Test Margins While Card Services Support Stability

Key Takeaways

• Deceleration in airline and entertainment spending may weaken future revenue growth projections, impacting overall revenue growth expectations.
  
• Macroeconomic uncertainties and spending challenges threaten revenue targets, exacerbated by rising reward expenses and potential spending contractions among small businesses.
  
• Strong customer spending, effective cost control, and a diversified revenue base position American Express to achieve stable revenue and withstand economic fluctuations.

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.

• The deceleration in airline spending suggests that future revenue growth from travel and entertainment segments could weaken, impacting American Express's overall revenue growth expectations.
  
• The heightened macroeconomic uncertainty, including potential unemployment rate increases to levels like 5.7%, could pressurize spending and earnings, creating challenges for hitting revenue and EPS targets.
  
• There are ongoing cost pressures from rewards expenses which grew 16% year-over-year, potentially compressing net margins if these expenses cannot be offset by revenue growth.
  
• Small businesses might face pressure due to potential economic challenges, negatively affecting spending volumes in this key American Express segment, which could impact overall revenue and profitability.
  
• If consumer spending pulls back or becomes volatile, particularly in the Millennial and Gen Z demographics, this could slow growth in card fee revenues, as these cohorts currently drive a significant portion of new account growth and spending.

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 16.3% today to 15.2% in 3 years time.
• The bearish analysts expect earnings to reach $12.2 billion (and earnings per share of $18.52) by about May 2028, up from $10.1 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 15.1x on those 2028 earnings, down from 19.1x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.7x.
• Analysts expect the number of shares outstanding to decline by 2.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

American Express Future Earnings Per Share Growth

Risks

• American Express has a premium customer base that continues to spend at healthy levels, with growth in spending on goods and services, supporting strong revenue performance.
  
• The company has significant expense leverage and flexibility due to its scale, enabling effective cost control and protection of profit margins even when investing for the long term.
  
• Retention rates are high and card fee growth was up 20%, both supporting a stable and potentially increasing revenue stream from existing and new customers.
  
• The business model is less reliant on lending revenues and is better positioned to withstand credit cycles, which may lead to stable earnings even during economic downturns.
  
• International Card Services spending showed strong growth across geographies, indicating a diversified revenue base that could help mitigate risks associated with economic volatility in specific regions.

Valuation

• The assumed bearish price target for American Express is $230.0, which represents the lowest price target estimate amongst analysts. 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 $80.3 billion, earnings will come to $12.2 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of $276.24, the bearish analyst price target of $230.0 is 20.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.