Many economists and experts project some level of recession in 2023, which is expected to negatively impact the future earnings of many companies.
But you wouldn't know a recession is right around the bend by looking at the performance of American Express (AXP 2.56%). The payments and card services giant is a longtime favorite of legendary investor Warren Buffett and is a long-time holding in the large equities portfolio of the conglomerate that Buffett runs, Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%).
Not only did AmEx beat earnings estimates in the third quarter, but it also reaffirmed its outlook for the full year, 2023, and 2024. Despite numerous headlines of weakening consumer demand weighed down by outsized inflation and rising interest rates, consumer spending at AmEx continues to be robust, which is one of several reasons this stock just keeps plugging along.
American Express saw strong activity leading to strong guidance
AmEx saw total volume across its end-to-end payments network come in just slightly below the previous quarter but still well above levels seen in 2021. Spending on AmEx cards on travel and entertainment (T&E) continues to exceed management's expectations this year and was up 57% year over year in the third quarter.
Image source: The Motley Fool.
CEO Stephen Squeri said on the company's earnings call earlier this month that it is seeing higher travel bookings than "we've seen in a long, long time. I mean that goes pre-pandemic."
Squeri also said that the holiday season is looking extremely strong because people are booking three months out. This is a big reason that Squeri isn't seeing any change in consumer spending habits and also a big reason the company reaffirmed its longer-term guidance.
AmEx still expects revenue for the full year to be up as much as 25% from 2021 and for earnings per share to exceed management's initial guidance of $9.25 to $9.65. In 2023, management still expects "higher than long-term aspirational levels of revenue growth." In 2024 and beyond, management is still aiming for revenue growth of 10% or more and earnings growth in the mid-teens percentage range.
The brand is proving exceptionally strong
One of the reasons that Buffett has always loved American Express is because he believes the brand is special, a characteristic he looks for in many of his investments. You can't always see it, but a powerful brand can be tremendously valuable to a business.
In the third quarter, AmEx added 3.3 million new cards, the highest level since the pandemic began and particularly in its fee-based products, where members pay annual membership fees. New cards taken out by millennial and Gen Z customers made up 60% of the new card growth in the quarter, showing just how much the brand is resonating with younger customers that could prove to have a higher lifetime value.
The brand is not only attracting younger customers, but also very high-quality customers from a credit perspective. Loan losses have been close to flat for the past three quarters now, while delinquencies ticked up pretty modestly. Additionally, the company's total allowance for loan losses is still significantly below what it was on the first day of 2020 when all large banks had to implement a new accounting method for how they reserve for loans.
AmEx CFO Jeff Campbell noted that he doesn't expect reserves to rise back to that level seen on the first day of 2020 because the company's loan book is now stronger. Furthermore, he noted that AmEx's loan book is one of, if not the highest-quality loan books in the industry, and therefore doesn't have as high reserves as its peers.
Things could change but AmEx is ready
Obviously, things could certainly change in 2023 and there could indeed be a severe recession. But as management noted, some would say the economy is in a slight recession right now and AmEx just grew revenue 27% year over year. Furthermore, management noted that what's happening in the stock market doesn't always correlate to spending trends in the economy.
AmEx's large-scale payments network, a premium loan book with a high-quality customer base, and a strong brand are just a few of the reasons this longtime Buffett stock can keep plugging along despite what appears to be an uncertain economic outlook.
Make no mistake -- if there is a recession the company is resilient and will be able to adapt, but right now management simply isn't seeing any signs that would cause it to change its trajectory.
