The economy is pressured, many retailers are dealing with sales declines and losses, and the end isn't in sight yet. But some companies are demonstrating solid performance, like American Express (AXP 3.02%). How has it done this? Let's take a look at how it got there and where it's going.

A resilient client base and new cohorts

American Express has been posting strong growth since it rebounded from pandemic declines. That continued with a 22% year-over-year sales increase in the 2023 first quarter, despite macroeconomic headwinds.

Part of the excellent performance is due to its highly resilient client base, which is more affluent than the average American and which is still getting back into leisure activities that were curtailed under lockdowns. 

Travel and entertainment spending is increasing at a high rate, while goods and services, the more essential categories, aren't growing as fast.

American Express billed business growth.

Image source: American Express.

Management attributed its growth specifically to its successful marketing to a younger clientele, and this is yielding strong results. The company has managed to reshape its image to reflect this cohort's needs, offering a wide array of perks that fit this group. At the same time, they're branded with the American Express image that has long served as a symbol of the well off.

American Express added 3.4 million cardholders in the first quarter, and several of its card types had record signups. Millennials and Gen-Z members accounted for 60% of signups, and they also spent more than any other group, increasing 28% more than last year.

In general, American Express' client base has more spending power, and under duress, it's still potent. For example, in the first quarter, American Express posted a record number of reservations on its Resy restaurant reservation app.

Can it keep this up?

Long-term, American Express has the right formula for steady growth and increasing profits. However, a year from now, it's likely to be fending off continuing headwinds from higher interest rates, and even its resilient customer base may begin to slow down.

Last week the Federal Reserve didn't raise interest rates but signaled that more rate hikes were likely. So far, the higher interest rates haven't slowed inflation enough to end the cycle of increases. That prolongs the economy's delicate state.

Even now, this is hurting American Express' bottom line. Since it acts as its own bank, it feels the effects of higher interest rates in elevated default rates. In the first quarter, it built up its reserves by $320 million for a total of more than $1 billion. That comes out of net income, which decreased 13% from last year to $1.8 billion.

The company knows the current performance won't necessarily last. Chief Executive Officer Stephen Squeri said, "We're mindful of the mixed signals in the external environment." Still, management reaffirmed its full-year guidance of 16% revenue growth at the midpoint and earnings per share (EPS) of $11.20 at the midpoint, ahead of $9.85 in 2022.

It also provided a long-term projection of annual revenue growth of more than 10% and EPS growth in the mid-teen percentage.

What about its stock?

American Express stock is up nearly 14% in 2023, exactly on par with the S&P 500. In a year from now, if the company can meet its outlook and its spending base holds up, the stock should rise. If we hit a recession, which more experts are saying is unlikely, that could change. 

Long-term, American Express is well positioned to add new members and continue operating an efficient and profitable business. Its stock trades at the very reasonable valuation of less than 18 times trailing-12-month earnings, and long-term investors should consider adding shares of this Buffett favorite to their portfolios.