Consumer spending on travel and entertainment has driven a ton of economic growth as the world moves further away from the COVID-19 pandemic lockdowns. However, there is concern in economic circles that this growth in spending will only be a short-lived burst that tails off over the next few years once people get their travel fix in. For example, in China -- which didn't issue broad-based stimulus checks like the U.S. -- consumer spending has been much more muted even with pandemic closures officially over.
American Express's (AXP -0.62%) second-quarter earnings show that these concerns have not materialized in Western markets, at least not yet. Spending on travel and entertainment across the company's credit cards is growing at a solid double-digit percentage rate with big contributions from younger millennial and Gen Z consumers. In the middle of 2023, it looks like the recent travel boom still has plenty of room to run.
What is American Express telling us about the travel market, and what does it mean for the stock over the long term? Let's dig into the numbers and find out.
Another quarter of growing travel demand
American Express put up more strong growth in Q2 as it aims to increase revenue by at least 15% this year. Total revenue rose 13% year over year in the quarter to $15 billion, adjusted for changes in foreign currencies. Total network volumes advanced 9% year over year, which is a big slowdown from recent quarters but is lapping a quarter in 2022 when spending volumes rose 28% year over year (the quarter when most of Amex's core markets were booming coming out of the lockdowns). This made Q2 a tough comparison for spending volume on Amex cards.
The travel and entertainment category is doing especially well for Amex right now. Spending volumes for the category rose 14% year over year in Q2, even though the category put up impressive 84% growth in spending volume in the same period last year. A lot of this growth is coming from its travel partners. For example, Delta Air Lines just reported that remuneration to Amex for their credit card partnership increased 22% year over year in Q2.
While concern about the health of the U.S. economy persists among investors and analysts, Amex just let everyone know that its cardholders are doing just fine. If the economy were in a recession, it is unlikely that Amex payment volumes would be growing at close to 9% year over year and 14% for discretionary purchases in travel and entertainment.
Is American Express recession-resistant?
Even if predictions of a recession eventually materialize, Amex is set up better than almost any other financially sensitive consumer stock. It caters to wealthier customers who typically have better credit ratings and less spending volatility during tougher economic periods. For example, management said on its quarterly investor conference call that only 8% of Amex's credit card loans go to customers with FICO scores below 660, generally the threshold for risky subprime borrowers.
There is also the general tailwind of spending on travel, with annual airline passengers projected to double by 2040. A lot of these passengers will be prosperous Amex clients who will either have the company's proprietary cards or a card from one of its partners such as Delta, Marriott International, or Hilton Hotels. These two factors (wealthier clients and a focus on travel) should keep Amex growing through all parts of the economic cycle.
Thoughts on valuation and long-term growth
Management believes it can boost revenue by 10% or more a year from 2024 onward. A key input to this growth engine will be attracting millennial and Gen Z consumers to the Amex platform. Last quarter, the company continued to make progress in this regard, with these age groups boosting payment volumes by 21% year over year in the second quarter. The company added 3 million new cards to the Amex network last quarter. As long as there is a consistent inflow of new cardmembers to Amex every quarter -- especially younger ones who spend more as they age into their prime earning years -- the company should be able to achieve this 10% revenue growth hurdle.
Data source: YCharts
Through a consistent share repurchase program (shares outstanding are down 31% during the last 10 years), Amex is projecting earnings per share (EPS) growth at a mid-teens percentage rate from 2024 onward. Today, shares trade at a price-to-earnings (P/E) ratio of just 17.5, which is well below the 26.4 average for the S&P 500. A discounted valuation and double-digit EPS growth is a bulletproof recipe for long-term stock price outperformance. If you believe Amex can hit its long-term forecasts, the stock looks like an easy buy at these prices.
