Nothing seems to be able to stop American Express (AXP 1.00%) from delivering robust growth for shareholders -- not an uncertain economy, pressured consumers, tough year-ago comparisons, or even a skittish October. Indeed, management recently reiterated a view it first provided last January for 15% to 17% year-over-year revenue growth in 2023. Even more, Amex continues to stick to its aggressive long-term target for annualized average revenue growth of 10% or greater and earnings-per-share growth in the mid-teens in 2024 and beyond.
This strong business momentum, combined with the stock's cheap valuation, makes American Express one of my top investment ideas for 2024 and beyond.
What's behind the company's extraordinary momentum? Let's examine its operations to find out.
NYSE: AXP
Key Data Points
Where Amex's growth is coming from
The beauty of Amex's business model boils down to its ability to grow revenue and earnings in many different economic environments, thanks to a variety of levers.
For instance, consider how the payments company grew total revenue by 16% year over year for the nine-month period that ended Sept. 30, even though network volume grew only 9% year over year. Indeed, even when network volume slowed to 7% growth year over year in Q3, total revenue still rose 13%.
How does the company pull this off? The key to Amex's third-quarter growth was increased revenue from its membership fees (net card fee revenue rose 20% year over year), as new and existing customers increasingly choose cards with substantial annual fees in exchange for membership perks.
Adding to the versatility of Amex's business, net interest income is likely to accelerate during periods when the company's cardmembers spend less due to macroeconomic uncertainty. This is because revolving loan balances typically increase during times of economic weakness.
To this end, Amex's net interest income rose 34% year over year in Q3 to $3.4 billion, accounting for 22% of total revenue. So this aspect of Amex's business arguably offers a lever for the company during more challenging economic environments.
Looking to earnings specifically, American Express benefits from faster volume growth during boom times. But there are levers to pull during tough times, as well.
During difficult economic environments, for example, Amex's earnings are bolstered by lower credit card reward utilization rates since customers spend less on traveling and ultimately redeem fewer travel perks. Similarly, the company's earnings may benefit from faster top-line growth during good times, when it's easier to acquire more high-quality card members. But Amex can offset some of the negative earnings impact of slower top-line growth during tough times by cutting back on card member acquisition marketing spend as it focuses spending on a smaller subset of higher quality credit profiles.
The point is, it's not too surprising American Express continues to grow nicely. Additionally, it's a testament to its model's resilience. Sure, its revenue and earnings would likely take a hit and potentially even turn negative during severe recessionary periods. But there's sound reasoning behind management's aggressive long-term targets, thanks to its resilient, nimble, and lucrative operation.
Fortunately, the stock's conservative valuation at about 15 times forward earnings seems to be already pricing in a recession. And as American Express CEO Stephen Squeri often reminds investors, every recession is followed by a recovery. With this in mind, the stock's low forward price-to-earnings ratio has arguably already factored in expected troubles.
A timely update from management
Notably, Amex management provided a timely update for investors earlier this month during the Goldman Sachs 2023 U.S. Financial Services Conference. Management's message was clear: Everything seems to remain on track for a strong finish to the year. Squeri reiterated that the company still expects to grow its top line by a total of 15% to 17% this year. And that view comes despite what was "a little bit skittish" October as far as billings growth goes.
Squeri's optimistic view for the company's full-year 2023 performance has been aided by a bounce back in November and "very strong" shopping trends from consumers between Thanksgiving and Cyber Monday, the CEO explained during the conference. Even more, Squeri said the company still expects to be able to average annualized revenue growth of around 10% or more in 2024 and beyond and, more importantly, earnings-per-share growth in the mid-teens.
Whatever the economy brings, the company's resilience in 2023 and management's confidence going into 2024 show that American Express is likely positioned to do very well over the long term -- especially in the context of the stock's very conservative valuation.
