Legendary investor Warren Buffett first purchased the credit card and payments company American Express (AXP 0.47%) in 1964 on his own, but his company Berkshire Hathaway would later make the company a large position in its equities portfolio in 1994.
Buffett and Berkshire have long loved the stock, which is likely one of the reasons it hung onto American Express as it was dumping many other bank and credit card companies in early 2020 at the onset of the pandemic. When the pandemic first hit, consumers and businesses tightened their belts and prepared for the worst. Many activities were canceled and public entertainment venues closed for months on end, while flying anywhere became a nightmare. Because its business is a large beneficiary of travel and entertainment (T&E) activity, American Express' stock took a hit as a result. But Buffett and Berkshire, who have long believed in the company's strong brand power for many years, decided to sit tight with the belief that the company could weather the storm.
It's taken some time, but travel and entertainment spending finally returned in a big way in the second quarter of 2022 and is now absolutely fueling this longtime staple of Berkshire's portfolio.
Better late than never
It took T&E longer to bounce back than other spending categories, likely because of how different COVID-19 trends could be in different parts of the U.S. and around the world, complicating travel policies. But boy, did it come on strong between April and June.
In the first quarter of 2022, total T&E billed business at the company was at about 88% of pre-pandemic levels seen in 2019. But in Q2, T&E billed business surpassed 2019 levels for the first time since the pandemic started, reaching 108% of levels seen in the second quarter of 2019.
American Express CFO Jeff Campbell also noted that all age cohorts across American Express have reached pre-pandemic T&E spending levels. Beforehand, the T&E comeback had been driven by Gen Z and millennials. Being older and likely more concerned about COVID-19, baby boomers had been slower to return to T&E but have now reached 2019 spending levels.
Within T&E, restaurant spending jumped 35% versus 2019 levels, while lodging and airlines were down 5% and 8%, respectively.
The rebound in T&E helped American Express generate $2.57 of earnings per share in the second quarter on total revenue of nearly $13.4 billion, which is up more than 30% year over year. Furthermore, American Express acquired a record 3.2 million new cards in the quarter.
The outlook is still positive
It's a bit odd to see T&E spending surging as many economists and experts predict there to be some kind of recession in the near future. But many large U.S. banks also reported healthy consumer spending in the second quarter. Furthermore, American Express CEO Stephen Squeri thinks the trend could be here to stay.
"And we don't see demand in the T&E categories declining significantly anytime soon," Squeri said in the Q2 earnings call. "Based on the strength of future bookings coming through our consumer travel agency and the trends our partners in the travel industry like Delta are experiencing, particularly in the premium space."
Squeri also said he doesn't think there will be a pullback because T&E has yet to find a new normal. While T&E spending is now above 2019 levels, lodging and airline spending are still below, as the airline industry deals with staffing issues.
Restaurant spending has been a big driver of T&E spend but Squeri said he's not overly concerned about a pullback in this category either. Prices are a little higher due to inflation, but Squeri also said he thinks restaurants will be OK because many have changed their models to add takeout and people are eating out more.
Restaurant spending is likely benefiting from the fact that grocery prices have been rising quicker than the cost of eating out, which makes restaurants more appealing right now. But I agree with Squeri that restaurants have changed their model and that eating out has become more of a social activity than ever before.
Management remaining conservative
Clearly, Buffett and Berkshire had all the confidence in the world in American Express and its management team not only to survive the pandemic but emerge from it stronger.
Largely due to the positive outlook for T&E spending, management raised its full-year guidance and now expects revenue in 2022 to be 23% to 25% higher than in 2021, up from its initial guidance of 18% to 20% higher. Despite higher revenue, however, management is maintaining its guidance for earnings per share to come in between $9.25 and $9.65 for the year.
Management attributed the decision to some pressure on operating expenses and the uncertainty in the macro environment, which could lead to increased loan losses. But I think this is prudent for now and leaves mostly upside on earnings guidance, which puts the company in a strong position.