Companies have been impacted by the coronavirus pandemic in different ways, some for better and some for worse. The financial industry in general has been hit by lower interest rates, but those with a strong credit card arm have been further harmed by reduced consumer spending and high provisions for losses.
American Express (NYSE:AXP) has not been spared from the trauma, but it's also in a unique situation considering its differentiated business model and clientele. Let's take a look at how it's been doing recently and if it's a buy today.
A challenging economic environment
At the end of the first quarter, when pandemic effects were at their worst and the only thing a business could rely on was uncertainty, American Express introduced four priorities for the year: supporting its workforce, protecting its customers and brand, keeping the focus on growth, and staying financially healthy. The company announced second-quarter earnings on Friday; CEO Stephen Squeri talked about how American Express executed on on these goals.
Net income came in better than expected that $257 million, despite general slowdowns in spending, and earnings per share were $0.29. However, all spending categories are showing improvement, even though some are still lower than last year. As of July, non-travel and entertainment spending is up 5%, even though travel and entertainment is down 75% year over year. As usual, cardmember fees provide some cushions against losses, gaining 15% and accounting for 15% of revenue.
Revenue increased from April through June along with a economy showing signs of a recovery as customers have come out to spend after lockdowns. While the numbers represent declines, Squeri emphasized that there were gains during the quarter. Customer service satisfaction levels increased year over year, and attrition rates weren't higher than usual.
To weather the crisis, American Express increased liquidity to record levels. The quarter ended with $1.6 billion in provisions for losses and a $62 billion reserve build.
Changing to meet demands
As a financial institution, American Express is on the front lines of the economic challenges facing people globally. And it has pivoted to deal with current behaviors. As spending habits changed, American Express adjusted its rewards program to reflect new shopping trends. It has been offering promotions toward in-demand categories such as wireless, grocery, streaming, and food delivery. This has resulted in increased member engagement with these value-added categories. It has also focused on its small business membership with a "Shop small" campaign to which it's devoting $200 million to encourage spending at small businesses.
As the pandemic hit, American Express created a CPR program -- customer payment relief -- as well as a deeper program for those who needed more time and help. As of the end of the second quarter, three-quarters of those in a pandemic relief program are now back to paying bills.
As for future growth, the company is looking beyond its trusty regulars in travel and entertainment to refresh and launch new products. But it also announced a renewal of relationships with British Airways and Marriott hotels. As for commercial, the company saw increased demand for payment solutions as businesses go remote. It has enhanced contactless payment capabilities and is expanding digital payment solutions, such as click-to-pay for secure transactions.
A big win for the company is that it became the first foreign payments network to be licensed to clear local currency transactions in mainland China.
To buy or not to buy?
American Express reported a profit during a very slow period and maintained its dividend, unlike some other financial-services companies. It has a strong cash position and pivoted to meet new demands and behaviors, focusing on future growth. Its share price was down about 24% year to date as of Friday's close, and it had a trailing 12-month price-to-earnings ratio around 19, making it a great value. I would call that a buy.