American Express (AXP 0.85%) was in excellent form again in the first quarter, posting a 22% revenue increase while adding millions of new cardmembers. It's enjoying the resilience of its affluent client base and specifically a return to travel and leisure.
But after originally forecasting a sweet 2023, Chief Executive Officer Stephen Squeri made reference to "mixed signals" in consumer engagement. What can we expect from this long-held Warren Buffett stock for the rest of the year?
A resilient cardmember base powers spending
American Express reaffirmed its projection for 15% to 17% revenue growth for full-year 2023, so a 22% increase year over year is a great way to start off.
Earnings per share was down from last year, from $2.73 to $2.40, but that's not worrisome -- it's typical for American Express (and any bank) to shore up its provisions for credit losses in a high interest rate environment and defaults and write-offs are likely to increase. Those provisions come out of its net income.
American Express is a unique company because unlike credit card processors Visa and Mastercard, it doesn't have relationships with banks to underwrite credit card loans. Instead, it has a closed-loop network and acts as its own bank. What comes along with that are some bank-like qualities, and that increases its exposure to bad credit.
There were 3.4 million new cards issued in the first quarter, with record levels of U.S. consumer Platinum and Gold members, U.S. business Platinum members, and Delta co-branded members. Despite all of the achievements in 2023 thus far, Squeri said the company is "mindful of the mixed signals in the external environment."
Why Squeri may be worried
This kind of performance is particularly strong considering the volatile macro environment. But smartly, management isn't patting itself on the back and ignoring its surroundings. It has its eye on what's going on and is preparing accordingly.
Investors have already seen many other companies that originally looked like they were besting inflation eventually meet up with some negative impact. Costco Wholesale is a good example.
Even in this quarter, the signs were there. Consider the growth in cardmember receivables in the first quarter.
Image source: American Express.
The short-term effect of that is higher interest on more money, which is good for American Express's income statement. The wider impact could become slower spending and increased defaults.
What about the long-term prospects?
One of the more recent developments for American Express is the strength of its younger consumers. It has successfully shifted its business from an old-school businessperson core customer to a young and upscale cohort. Consider the growth in U.S. billed business by age group.
Image source: American Express.
Beyond its generally effective business operations and strategic acquisitions and partnerships, this is the most compelling reason to believe American Express has a bright future for a long time.
Should you buy American Express stock?
All of this is best viewed through the lens of the business's patterns. Short-term impacts are just that. Since this is a top Buffett stock, I'll recall his explanation that he looks at investing as buying pieces of great businesses, not stock-picking. No one knows for sure what will happen to American Express stock this year, or any stock for that matter. We also don't know how external factors will affect American Express' business this year.
What we do know is that American Express has expertly navigated through tough times in recent years, and it has the experience and tools to continue doing that regardless of economic trends. That's why it's a great stock to own for the long haul.
