When someone thinks of a "Warren Buffett" stock, you don't normally associate it with Generation Z -- the generation born after 1997. After all, Buffett turned 91 a few months ago and is mostly known for investments in candy, insurance, and railroads -- not cloud software, crypto, and meme stocks.
But one thing Buffett does seek out is durable brands that can stand the test of time. That's what it looks like he's found in American Express (AXP 3.31%), which Buffett bought back in the early 1990s. After spending much of the past 30 years positioning itself as a premium brand for well-off clients who like to travel, AmEx's management appears to have found its stride with the younger generation -- and it's showing up in the company's financials.
Earnings have impressively roared back sooner than expected
American Express just reported its earnings on Friday, Oct. 22, blowing away analyst estimates. Revenue surged 25%, with earnings per share up a whopping 75% over the past year. The quarter's $2.27 EPS figure beat analyst estimates by a huge $0.50.
It's true that AmEx was lapping the second full quarter of the pandemic and therefore had somewhat easy comparisons. Still, American Express' bent toward travel and leisure, as well as corporate travel, was supposed to keep its earnings power at bay until the pandemic had fully passed. And the emergence of this summer's delta variant could have thrown a wrench into the recovery.
Yet AmEx's billed business turned positive versus 2019 levels for the first time since the pandemic. And that's all the more remarkable considering travel and leisure spending, baby boomer spending, and large enterprise travel spending still lag pre-pandemic levels, by a lot.
So how did American Express outperform?
Pivoting benefits, courting millennials and Gen Z
AmEx's outperformance came from incredibly strong performance from its millennial and Gen Z cohorts. While this combined group makes up only 27% of AmEx's consumer spending, millennial and Gen-Z billed business surged 48% year over year and even 38% when compared with 2019. That compares with a 9% increase from Gen X (39% of AmEx's consumer spending) and a 6% decline from baby boomers (34% of AmEx consumer spending). And that trend looks to continue, as 75% of new Gold and Platinum cards came from millennials and Gen Z last quarter. Overall, Amex increased new card acquisition by 86% to 2.6 million, up from 1.4 million cards acquired in the year-ago quarter.
While American Express may seem like a relic of a former era, but this pivot has been ongoing for a few years, as management has been injecting relevant benefits for younger consumers into its premium cards while also increasing its digital capabilities. For instance, while "buy now, pay later" start-ups have become all the rage this year, American Express has had this capability for its card members since 2017.
But it's not just the buy now, pay later functions that millennials and Gen Z are drawn to. In fact, Squeri pointed out the younger cohort enjoys travel, experiences, and access to exclusive events even more than the baby boomer generation. That, combined with the addition of digital benefits on streaming and food delivery, are helping bring in the millennials and Gen Z cohorts to the AmEx brand. On the conference call with analysts, Squeri said:
[M]illennials and Gen Zs are about experiences and they're about access. And I can speak for experience, having a household of them. And so they love to travel. They love to do things. And when you look at the platinum card product, which had always been positioned as, hey, I'm a real high spender. I need to have that platinum card product, you have to look at the utility of this product. And you look at fine hotels and resorts and you look at the value that you get out of a fine hotel and resort booking with an early check-in and a late checkout and a free breakfast and $100 credit at the hotel. And then you look at streaming credits. They're online shoppers. There's rewards accelerators. There's travel credits. There's access to tickets. There's access to special card member events. It is a range of services that they use. ... So when they look at this product, it really is a lifestyle product for them, one that ranges from their everyday activities of online spending and streaming, all the way to traveling and the credits they get.
Keeping the brand relevant
While many card companies pulled back during the pandemic, AmEx lavished new rewards into its premium cards to retain those valuable customers, while attracting new customers seeking relevant discounts in the stay-at-home economy while racking up points to use on a future tip. Those efforts appear to be paying off.
In fact, with the rewards usage it's seeing, management now sees the opportunity to raise fees, recently hiking its high-end Platinum Card fee 25% from $550 per year to $695. That's quite a bit of pricing power right there, and an important part of American Express' financials. While spending patterns and credit quality can fluctuate with the economy, as we saw during the pandemic last year, annual card fees tend to be steadier and more subscription-like. In fact, card fees were the only revenue segment that increased for American Express during the pandemic, growing 15% in 2020. In the third quarter, card fees were up 27% versus 2019, making up 12% of AmEx's revenue. But remember, this is before the recent fee increase.
American Express was able to pivot its brand impressively to do right by its customers during the pandemic. Now, the company appears stronger, and with a more diverse customer base, than it was just a few years ago. When travel, leisure, and business travel fully return, AmEx will get back to full strength, but with an even broader business coming out of the pandemic than when it went in. Kudos to AmEx's management team for their pandemic performance; those management decisions made in 2020 should benefit shareholders for years to come.