American Express Earnings Preview: Riding the Wave of Resilient Spending

American Express (AXP) is set to release its fourth-quarter 2024 earnings before the market opens on January 24, 2025. With the stock recently hitting a 52-week high, expectations are running high, fueled by robust consumer spending, particularly within its affluent customer base, and positive commentary from the travel sector. This article delves into the key metrics, drivers, and valuation considerations surrounding the upcoming earnings release.

Wall Street anticipates American Express to report earnings per share (EPS) of $3.03 on revenues of $17.19 billion for the fourth quarter. This represents a substantial year-over-year increase of 15.7% in EPS and 8.8% in revenue. For the full year, consensus estimates point to revenues of $65.95 billion, a 9% year-over-year increase, and EPS of $13.40, a 19.5% jump. The upward revision of the consensus EPS estimate by 1% over the past 30 days further underscores the positive sentiment surrounding the company.

Several key metrics will be closely watched by investors. Analysts project significant growth in loan portfolios across various segments.

- Commercial Services Total loans are expected to reach $30.48 billion, up from $25.8 billion last year.

- U.S. Consumer Services Total loans are forecasted to hit $91.00 billion, compared to $83.2 billion a year ago.

- International Card Services Total loans are anticipated to reach $18.56 billion, up from $17 billion.

Overall, Average Card Member loans are expected to reach $136.84 billion, a notable increase from $121.8 billion last year, and Total Card Member loans are projected to reach $140.03 Billion, up from $126 Billion.

Beyond loan growth, other crucial metrics include

- Card billed business (Network volumes), expected to reach $458.67 billion, up from $434.4 billion a year ago.

- Analysts also anticipate growth in Total Interest Income, projected at $6.19 billion compared to $5.55 billion last year, and Total non-interest revenues, expected to reach $13.07 billion, up from $12.20 billion.

- Net Interest Income is forecasted at $4.12 billion, compared to $3.60 billion last year.

- Net card fees are expected to reach $2.26 billion, up from $1.91 billion.

Several key drivers are expected to contribute to American Express’s performance. Resilient consumer spending, particularly among its affluent customer base, is a significant factor. This demographic is generally less sensitive to economic downturns and inflationary pressures. The strong performance of airline stocks like Delta Air Lines (DAL) and United Airlines (UAL), coupled with their positive commentary on business travel, bodes well for American Express, as business travel represents a significant portion of its spending volume.

Analysts at Bank of America have highlighted the positive implications of bank results for American Express, noting its spend-centric business model and the positive impact of better purchase volume data. JPMorgan Chase (JPM), another major player in the financial sector with a significant high-spending customer base, also reported solid spending acceleration, further reinforcing the positive outlook for American Express. BAML is modeling 2.4% year-over-year credit card spend for AXP and its peers, but bank results suggest potential upside to these numbers.

From a valuation perspective, American Express is currently trading at 20.70 times forward 12-month earnings, which is above its five-year median of 16.49 times and the industry average of 16.16 times. This premium valuation suggests investor confidence in the company’s prospects. However, it’s worth noting that American Express’s valuation is significantly lower than its primary competitors, Visa (V) and Mastercard (MA), which are trading at 27.78 times and 32.22 times forward earnings, respectively. This relative undervaluation could present an attractive investment opportunity.

In terms of recent price action, American Express’s stock has gained an impressive 71.9% over the past year, significantly outperforming the industry’s growth of 22.3% and the S&P 500’s gain of 24.8%. This strong performance reflects the market’s positive sentiment towards the company’s prospects.

While the outlook is largely positive, investors will also be watching for potential headwinds. Increased expenses related to card member services, marketing, and salaries could put pressure on margins. Additionally, higher provisions for credit losses are anticipated.

In conclusion, American Express is entering its fourth-quarter earnings release with strong momentum. Robust consumer spending, a resurgence in business travel, and positive commentary from the broader financial sector paint a promising picture. Investors will be closely monitoring key metrics like loan growth, network volumes, and interest income. While the valuation reflects investor confidence, it remains relatively attractive compared to its main competitors. The upcoming earnings release will provide further insights into the company’s performance and its outlook for the future.