What happened
American Express (AXP 3.13%) has been posting solid results of late, but investors are worried about how long that can last if the economy slows ahead. On Thursday, management indicated it sees no signs of a slowdown, and shares traded up about 3% at 2:45 p.m. ET today as a result.
So what
AmEx, a financial services company historically known primarily for catering to the rich, has done a good job in recent years expanding its reach to a broader slice of the market and growing profits in the process.
But the current economic climate offers some challenges to lenders. The Federal Reserve's aggressive moves to push interest rates higher threatens to slow economic growth and make it harder for consumers to pay their bills. When that happens, credit card companies typically have to set aside more money to cover potential losses, which can affect profitability.
American Express has indeed been building its reserves. but CEO Stephen Squeri, speaking Thursday at the Bernstein Strategic Decisions Conference, said "we feel really strong" about the company's ability to hit its forecast of $11 to $11.40 in earnings per share (EPS) for the year. Wall Street is forecasting EPS of $11.16 for the year.
Now what
Squeri indicated that things are fine for now, but he has no better ability to see the future than anyone else does. He admitted that if the company does need to build reserves further, "we're not going to starve the business to make a number for a given year or a quarter." That means that if lending conditions go south from here, American Express won't be afraid to come in below that guidance.
In the near term, that could cause a negative reaction to the share price. But for long-term holders, those words should be reassuring. AmEx has nearly doubled the performance of the S&P 500 over the past three years because it is focused on long-term value creation, and not worried about quarter-to-quarter variations.
