Please ensure Javascript is enabled for purposes of website accessibility

The American Express Company's Winning Formula

By Matthew Cochrane – May 8, 2018 at 9:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After a strong first quarter, can American Express continue to produce big returns for investors? The company's management emphatically believes it can, especially if it sticks to its newfound formula for success.

When the American Express Company (AXP -1.94%) lost Costco Wholesale as a corporate partner in early 2016, shares of the iconic credit card company tanked as investors wondered how the company was going to fill the huge void left by the significant percentage of members who held its Costco-branded card. Now, just two years removed from the fiasco, the company's stock price has largely recovered and is well on its way to seeing new all-time highs. Even a cursory glance at the company's first-quarter results shows that its performance is what's powering this upward movement.

When American Express recently reported its latest financial results, total revenues had risen to $9.72 billion, a 12% increase year over year, and earnings grew to $1.86 per share, a whopping 38% increase year over year. While a good chunk of that earnings boost was produced by the new tax legislation, even after adjusting for the new tax law, adjusted earnings per share growth would have still seen a double-digit percentage increase. Several factors contributed to this solid top- and bottom-line growth, led by the obvious growth of total loans to $75.8 billion, a 16% increase year over year. Other highlights included a 9% increase to almost $5.9 billion in discount revenue, the fee American Express charges to merchants, and a 23% increase in net interest income to just over $1.8 billion.

Amex Metrics Q1 2018 Q1 2017 Change 
Total revenues $9.7 billion $8.7 billion 12%
Diluted EPS $1.86 $1.35 38%
Total loans $75.8 billion $65.3 billion 16%

Data source: American Express Company. 

How has American Express been able to drive such strong growth after losing its biggest source of card holders just two years ago? It has done so by focusing on a new formula for success: using low-cost methods to find new customers and drive up spending from existing customers. Seems simple, right? Well, it's easier said than done, but the company is doing a marvelous job of executing this effective strategy. Let's take a closer look at exactly how the credit card issuer is so easily accomplishing its goals.

Close-up of gold-colored credit card showing the EMV chip and part of the number.

American Express is finding low-cost ways to acquire new customers and incentivize existing customers to use their cards more. That's a simple, but winning, combination for investors! Image source: Getty Images.

A new generation of card members

In the first quarter, American Express added 3.5 million new card members -- that's a lot! In fact, it's almost a million more than the company added in the first quarter of 2017. While a good portion of that is thanks to American Express acquiring Hilton Hotels' card portfolio, CFO Jeffrey Campbell insisted the company would have recognized double-digit percentage growth in new card accounts year over year even without the acquisition. He said the company was able to do this even as its traditional marketing spending decreased. When asked how during the company's conference call, he responded:

On the acquisition side, really the biggest thing I would point to ... is our relentless focus over the last couple of years on constantly driving more efficiency into our new card member acquisition efforts, particularly by getting better every quarter, every year in terms of our digital acquisition efforts. And that is really the largest, most important, and most sustainable aspect of what is allowing us to moderate marketing and promotional spend, while still getting really terrific results in terms of acquiring new card members.

Increased customer engagement

Beyond adding new members, the other side to AmEx's phenomenal success over the past year has been increasing customer engagement. While expenses increased by double-digit percentages for both Card Member Services and Card Member Rewards, Campbell believes these are the areas where American Express really differentiates itself from the competition by offering rewards and perks that are not found elsewhere. Two of the things he specifically called out were increased airport lounge access for travelers and giving Delta Air Lines passengers first-bag-free perks. When asked about the fierce competition for rewards, Campbell added:

I don't feel the need to do anything dramatic in response to what else is out there ... We have also really focused the last couple years on evolving our value propositions in ways that try to leverage the unique differentiated assets we have. And the growth you see in the card member services line is a part of that but ... all of those things allow us to do things with a variety of partners and to do things like our global lounge program that are we believe difficult for others to match.

There is other evidence that existing card members seem to be extremely happy with their relationship as well. Halfway through a year-long rollout of price increases for Platinum card members, the company is not seeing any uptick in attrition rates.

Amex's winning formula

While this seems like a simple formula for success, it has proven to be extremely difficult for many companies to carry out. Yet American Express has thus far been able to pull it off. It has found new card members by focusing on low-cost acquisition channels and increased card member engagement by giving their customers the perks and rewards they want. More new members and increased business from existing customers -- a simple but winning combination!

The company seems confident it can continue to achieve success on the back of successfully executing this formula. During the quarter's conference call, management guided that it now expects to hit the upper range of its EPS guidance of $6.90 to $7.30 for 2018. Using $7.20 as a guidepost, then, shares still sell at an extremely attractive forward P/E ratio of 13.8, even after the jump in price after reporting its earnings. With an attractive valuation and a proven winning strategy, investors might want to give American Express a second look while its shares are still on sale.

Matthew Cochrane has no position in any of the stocks mentioned. The Motley Fool recommends American Express and Costco Wholesale. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

American Express Company Stock Quote
American Express Company
$140.26 (-1.94%) $-2.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.