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Morningstar | American Express Shrugs Off Higher Expenses With Continued Growth

Wide-moat American Express had solid performance during the third quarter, building on the company’s recent growth and momentum. Revenue net of interest expense climbed 9% from the previous year to $10.1 billion while earning $1.88 per share in diluted earnings, a 25% year-over-year increase. However, we’ll point out that last year the company incurred some non-recurring charges within its merchant segment that provided for an easier comp. Nevertheless, this quarter’s results align with our near-term outlook as we continue to believe the company will benefit from increased corporate spending leading cardholders to spend more on travel and entertainment. That said, this quarter’s growth did not come without some investment. Compared with last year’s third quarter, card member rewards increased 11% while services jumped 30%. It would appear that credit card companies are seeing increasing levels of competition to attract new customers. Given these results align with our overall thesis and forecast, we will be maintaining our fair value estimate of $112 per share.

American Express' recent growth has been exceptionally diverse and widespread as the company’s two largest segments, Global Consumer and Global Commercial, grew revenue after provisions by 12% and 9%, respectively. During the call management mentioned that new consumer accounts on its U.S. Platinum Card are up more than 50% and half of that growth is attributable to millennials. For us, attracting millennials is a long-term concern as we’re not sure that the company’s brand resonates with younger consumers. However, American Express’ recent success with millennials modestly eases our concerns the company can generate growth from the next generation of consumer.

As mentioned, the company is seeing heated growth in rewards spending. Management remarked on having to increase rewards in order to match competitor offerings. Now that JPMorgan has decreased its upfront credit card rewards, it will be interesting to see what impact, if any, this has on American Express. For now, the company is telling investors to continue expecting accelerated growth in rewards expense.

Finally, we have been worried what impact higher interest rates would have on American Express as the company uses deposits for only half of its funding. Though the company may see lower interest margins resulting from higher rates, much of this will be met with an improving economy. Net-net, we do not view higher rates as a significant concern for the company.