💳 Is American Express Living Up To Its Tag?
Robinhood shares tank after quarterly loss.
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💳 American Express: Special Or Very Special?
Warren Buffett's "special one" reported a robust Q4. American Express (AXP), the world's largest issuer of credit cards in terms of transactions, surpassed analyst expectations owing to record card spending. Berkshire's third-largest holding appears to be living up to its title. (Tweet This)
Spend To No End
Q4 was the holiday season in the US - a period when people usually spend on gifts, travel, and have a jolly time. This time around, Christmas cheer was marred by yet another pandemic wave, with the US reporting nearly a million cases a day.
Aviation and Travel & Tourism bore the brunt as airlines canceled thousands of flights due to crew members falling ill. In circumstances like these, one would assume consumer spending would take a back seat. But that wasn’t the case for American Express, which is among the leading credit card issuers in the US, alongside Visa and Mastercard.
Just one quarter after surpassing pre-pandemic levels in terms of spending, AmEx customers charged $368.1B on their cards during the quarter (Vs. $285.9B during the same period in 2020). That translates to a spend of $6.3K per member (Vs. $4.9K per member in 2020). This splurge translated into a bulge in both the company’s top line and bottom line.
Key Highlights From Q4:
Revenue: $12.1B Vs $11.5B expected
EPS: $2.18 Vs $1.87 expected
Net profit: $1.72B - up 20% Y-o-Y
What also boosted results was the company's release of $168M of reserve capital held for loan losses.
For this year, AmEx expects topline growth of ~20% and EPS of ~$9.45. Starting Q1 2022, the company plans on increasing the regular quarterly dividend to $0.52 per share from $0.43 earlier (subject to board approval).
Who’s Out There Spending?
AmEx has managed to attract the attention of Millennials and Gen-Z, and that’s a good thing. This demographic accounted for ~60% of the new accounts acquired by American Express throughout 2021. Three-quarters of its premium cards belonged to Millennials.
The focus on this consumer segment is not surprising since Gen-Z spending is up 17% from Q4 2019 while the Baby Boomer category has remained flat. To cater to this growing segment, the company is looking at credit card offerings beyond travel to include lifestyle categories such as dining, entertainment, and wellness.
Rewards for spending also rose as AmEx aggressively courted this coveted consumer segment. For Q4, overall expenses stood at $9.8B, $500M higher than analyst expectations. An increase in employee compensation was another factor contributing to the rise in costs.
When we last wrote about the company on December 2, 2021, we had wondered whether Omicron would throw a spanner in the works and arrest consumer spending on travel and entertainment. Surprisingly, the category spending stood at 82% of 2019 levels (compared to 71% in Q3 and AmEx's projection of 80%).
2021 was also a watershed year for AmEx to acquire new US SME accounts (the company defines an SME as a business having annual revenue of $300M or less). The division now contributes to over one-third of the company's total network volumes.
The same level of bullishness cannot be ascribed to AmEx's large and global corporate customers. The continued concerns owing to the pandemic, lesser business travels, and lesser in-person meetings have meant these customers' travel & entertainment spending is a paltry 36% compared to 2019 levels.
Investors cheered the company's results as shares rose 10.3% over Tuesday and Wednesday. The two-day jump made Warren Buffett richer by $2.5B. As per holdings of the September quarter, Buffett holds 151.6M shares in the credit card issuer and is the third-largest holding of Berkshire Hathaway.
American Express is looking to grow its SME business and Millennial/Gen-Z business as it seeks to diversify away from the big corporates. As it successfully emerges from the pandemic with this diversification strategy paying off handsomely, the company has managed to justify Buffet’s “special” tag. All the same, there’s no scope for complacency. The hard work has only just begun!
AXP ended at $171.90, down 1.95%.
Company Snapshot 📈
AXP $171.90 -3.42 (1.95%)
Analyst Ratings (28 Analysts) BUY 46% HOLD 50% SELL 4%
Trouble: Robinhood posts $423M net loss, shares sink after hours (HOOD -6.45%)
Better: Apple sales and profit top estimates as the hit from chip shortages ease (AAPL +5.04%)
Bad News: Tesla sinks after supply chain warning, hitting other EV makers (TSLA -11.55%)
Splurge: Visa profit beats quarterly estimates on higher travel, online spending (V +5.23%)
Later Today 🕒
Autoliv Inc. Earnings (ALV)
Badger Meter Inc. Earnings (BMI)
Caterpillar Inc. Earnings (CAT)
Chevron Corporation Earnings (CVX)
Colgate-Palmolive Co. Earnings (CL)
Provident Financial Services Inc. Earnings (PFS)
7:00 PM IST: Core Inflation data
7:00 PM IST: Real Consumer Spending
Today's Market Terminology: Death Cross
A Death Cross is a bearish signal generated when the 50-day Moving Average crosses below the 200-day Moving Average
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