American Express (AXP) blurs the line between a traditional credit card company and effecting traditional banking services such as personal and business loans and savings accounts. This business model blend makes American Express a dual-threat as it can ride the wave of improved consumer spending coming out of the pandemic as witnessed by its blow-out second-quarter earnings and rising interest rates as the Federal Reserve steps off its accommodative easing policies. American Express has recently dropped over 10% from its 52-week high after target price hikes and upgrades across a broad range of analysts. Couple this with inexpensive valuation metrics, and the fundamental and technical investment case comes together nicely. American Express sits in the sweet spot of an improved consumer and a potential rising interest rate environment.
Latest Earnings and Growth
The recent earnings report by American Express demonstrated its strength and potential growth moving forward as the pandemic continues to subside. Analysts across the board upgraded the stock and increased the price targets because of these stellar earnings. Earnings blew past analysts' estimates, driven by a recovery in global consumer spending, specifically on travel. Consumer spending logged double-digit growth in the second quarter. The U.S. consumer has "rocketed ahead on travel," per CFO Jeff Campbell, with spending related to travel and entertainment on its cards within the United States reaching 98% of pre-pandemic levels. On global travel and entertainment spending, he said it had recovered to nearly 70% of 2019 levels, two quarters earlier than previously expected. Strong demand for premium, fee-based products helped drive the addition of U.S. Platinum card members to record levels, per CEO Stephen Squeri. The company sold 2.4 million new proprietary cards in the quarter, while spending on goods and services on its cards grew 16% on a currency-adjusted basis. Net income rose to $2.28 billion, or $2.80 per share, for the quarter ended June 30 from $257 million, or 29 cents per share, a year earlier. Analysts had expected $1.67 per share, according to Refinitiv IBES data. Excluding interest expense, American Express’ total revenue rose 33% to around $10.24 billion.
Financial Cohort Financial Linkage
The confluence of rising rates, post-pandemic economic rebound, financially strong balance sheet, and a robust housing market will be tailwinds for American Express, just like it will be for the big banks. Recent CPI readings have spooked the markets as these serve as a harbinger for the inevitable rise in interest rates which translates into higher margins for lenders. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed and may introduce some systemic risk; however, those that are in the lending business will benefit from higher rates and expanded margins within those business segments. American offers personal and business loans and offers savings account as well, which will all bode well in a rising interest rate environment.
Inexpensive Stock
American Express currently boasts a P/E of 18.5 and a PEG of only 0.45 after a nosedive from its 52-week high of $180 to $160 or an 11% haircut out of nowhere and unrelated to earnings. During this nosedive, AXP sits at its most oversold condition over the past year. Technically, the Relative Strength Index (RSI) and Bollinger bands were both in agreement that this move down has been overdone.
Some of the more noteworthy analysts across the board have recently upgraded price targets on American Express. Morgan Stanley has a price target of $200, Goldman Sachs has a price target of $219, Deutsche Bank has a price target of $190, and JPMorgan has a price target of $197. The vast majority of these analysts have an overweight or outperform rating on the stock.
Conclusion
American Express’ business model blend makes the company a dual-threat as it can ride the wave of improved consumer spending coming out of the pandemic as witnessed by its blow-out second-quarter earnings and rising interest rates as the Federal Reserve steps off its accommodative easing policies. American Express has recently dropped over 10% from its 52-week high after target price hikes and upgrades across a broad range of analysts labeling the stock as a buy or overweight. American Express boasts an inexpensive valuation relative to its credit card peers Visa (V) and Mastercard (MA). The recent earnings report by American Express demonstrated its strength and potential growth moving forward as the pandemic continues to subside. Earnings blew past analysts' estimates, driven by a recovery in global consumer spending, specifically on travel. American Express (AXP) is a compelling buy after this double-digit sell-off due to exogenous market events unrelated to the fundamental and technical combination.
Noah Kiedrowski
INO.com Contributor
Disclosure: The author holds shares in AAPL, AMZN, DIA, GOOGL, JPM, MSFT, QQQ, SPY and USO. He may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.
