American Express: Travel Spending Is Killing The Name Right Now (NYSE:AXP)

Prepared by Stephanie, analyst at BAD BEAT Investing

American Express (NYSE:AXP) is a name that entered 2020 in much better condition than it was just a few years ago. My, how things have changed. With such a big focus of its clientele and rewards program on ‘travel’ it has faced immense pressure. Our consumer-driven economy has been decimated by COVID. We know that millions are out of work. Tens of thousands of businesses have closed. The financial stocks as a whole sold off extremely hard during the broader market selloff. For the most part, our coverage over at BAD BEAT Investing suggests that results so far, as a whole, have been better than expected believe it or not for the sector. The sector stands to benefit from another massive stimulus and loan program. American Express has long been one of the biggest consumer lenders in terms of quality. We have traded this name many times. We still believe there are several strengths and weaknesses you need to be aware of in the key metrics that we follow. In this column, we check in on the performance of American Express. We believe you need to wait until sub $95 to buy this stock in this climate, and should plan to scale into the investment if the market allows. Travel is a big problem here. That said, Q3 had some strengths and some notable weaknesses to be aware of.

Top line sees pressure

One of the metrics that caught our eye was the top line revenues. We were expecting pressure that picked up in the summer but handicapping it was difficult. We were expecting revenues of $8.5-$8.9 billion. They came in at $8.75 billion, beat our expectations at the midpoint by $50 million and delivered a decline of 20.4% versus last year’s Q3. The top-line beat versus what we were looking for is certainly welcomed news but it is still tough to sugar coat a 20% decline. We will say that AXP also beat against consensus estimates. This was also the first quarter Q3 that saw revenue contraction in years. Given the erosion of consumer demand and decline in travel we are not surprised. The pressure follows trends seen in other card issuers though the declines were steep. The company has continued to rein in expenses, helping drive earnings.

Expense management

When we see revenue get hit, a company’s expenses can make or break financial services companies. The company is aggressively reducing costs across the enterprise, while at the same time selectively investing in initiatives that are key to its long-term growth strategy. Loan loss provisions actually fell sequentially and from the year before which was positive. With revenues down, we hoped to see expenses fall. They did. The company’s consolidated expenses totaled $6.7 billion, down 14% from a year ago.

Here are the key reasons for the difference year-over-year. The decrease primarily reflected significantly lower customer engagement costs due to the decline in card member spending and lower usage of travel-related card member benefits, partially offset by investments in value proposition enhancements for many of the company’s card products, as well as expenses related to the largest ever Shop Small campaign that was done in the quarter.

Earnings figures

What about the earnings figures themselves? Well, factoring in the 0.5% fall in revenues and 5% decline expenses, and the fact that the company built loan loss provisions, we saw net income come in at just $367 million, down from $1.55 billion a year ago. On a GAAP basis, there was income of just $0.41 per share, down from $1.80 a year ago. However, if we back out the loan loss provisions, the adjusted earnings per share surpassed our expectations by $0.20 and came in at $1.98.

The first two months of the quarter were likely strong, while March felt the impacts of economic losses, shutdowns, etc. The deterioration in the economy due to COVID-19 impacts that began in the first quarter has as we know accelerated in April. This will dramatically impact volumes. It may last into 2021, but should start to improve as things open back up travel wise.

Loan losses and looking ahead

One of the items we always like to look at is the provision for loan losses. Provisions for credit losses expanded dramatically in Q1 and Q2 and made the EPS print get crushed for many financial services companies as the companies braced for a wave of consumers being unable to pay. Generally as these provisions rise, it may mean the company is taking on risky debt. Right now, the company is looking at most of its lending being risky just given the situation. However, stimulus and better than expected outcomes with COVID cases led to consumers paying their bills. This led many financials to reducing loan loss provisions in Q3. Despite weakness in member spending, AXP also reduced its provisions. The loan loss provisions fell dramatically from last year’s Q3. Consolidated provisions for credit losses were $665 million, down 24% from $879 million a year ago, and down 57% from $1.555 billion in Q2. The decrease primarily reflected a modest reserve release and lower net write-offs. Total credit reserve levels at the end of the third quarter were generally consistent with second-quarter levels.

It is a tough time to be invested in AXP and similar companies. The market seems to be looking toward 2021. On the next big pullback, it may be a good time to start picking at this stock. Near-term, there continues to be a high degree of uncertainty about the direction of the virus and its impact on the economy, developments in the political environment, the availability of future stimulus packages, and how local governments will react to changes in local conditions. All of this will impact the stock. Since the lows of mid-April, we have seen a steady recovery in spending volumes. While credit remains strong, with delinquencies and net write-offs at the lowest levels we have seen in a few years, we remain cautious about the direction of the pandemic and its impacts on the economy, and so we are cautious on AXP. Given performance to date, with general spending expectations for the holiday season, we think that we see EPS for the year in the $3.25-$3.55 range. That makes the stock pricey here, but if the economy rebounds strong in 2021, EPS could double from 2020 levels. Wait for another pull back, then consider shares.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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