Decisive Marketing And Innovations Set To Boost Revenue And Card Member Growth

Key Takeaways

• Investment in marketing aims to drive growth through new account acquisitions and engagement, potentially increasing revenue and card fee revenue.
  
• Strategic investments in product innovations and technology, focusing on premium customers, are expected to enhance revenue growth and improve net margins through operational efficiencies.
  
• Elevated marketing expenses, slower U.S. consumer spending, international currency risks, credit risks from new premium cardholders, and increased operating expenses could affect financial performance.

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 company plans to invest around $6 billion in marketing in 2024, up $800 million versus last year, aiming to drive future growth through new account acquisitions and engagement—likely to impact revenue growth and card fee revenue.
  
• American Express has a loyal and high-quality premium customer base, with consistently strong new account acquisitions and 24 consecutive quarters of double-digit growth in card fee revenue, suggesting a direct impact on revenue from card fees.
  
• The increased scale of American Express's business has driven nearly 50% revenue growth and 40% card member spending increase since year-end 2021, which, combined with a well-controlled expense base, suggests potential improvement in net margins.
  
• Strategic investments in product innovations, technology, and acquisitions, such as expanding its dining reservation platform and planned acquisitions to enhance digital offerings, are expected to attract more customers and drive engagement, directly impacting revenue growth.
  
• Operational efficiencies and disciplined growth strategy focusing on high credit quality premium customers support a strong credit performance. This, coupled with expectations of stable write-off rates, suggests a positive impact on the cost of credit and, indirectly, on net margins.

Assumptions

• Analysts are assuming American Express's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.7% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $11.6 billion (and earnings per share of $16.59) by about August 2027, up from $9.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2027 earnings, which is the same as it is today today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.2x.
• Analysts expect the number of shares outstanding to decline by 3.47% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

• Elevated marketing expenses could lead to decreased net margins if the return on investment does not meet expectations.
  
• Slower growth in U.S. consumer spending and small and medium enterprise (SME) sectors might result in lower-than-anticipated revenue growth.
  
• International card services showing higher growth rates present a currency risk that could affect reported revenues and earnings.
  
• The focus on acquiring new cardholders, especially with premium products, entails credit risk if economic conditions deteriorate, potentially impacting net write-offs and provisions for credit losses.
  
• Increased operating expenses, due to investments in technology and control management capabilities, might not scale with revenue growth, adversely affecting operating margins.

Valuation

• The analysts have a consensus price target of $253.26 for American Express based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $285.0, and the most bearish reporting a price target of just $210.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $79.4 billion, earnings will come to $11.6 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $232.28, the analyst's price target of $253.26 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus 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.