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Morningstar | No Signs of Recession in American Express' 2Q

There was not much in American Express' second quarter that would fundamentally alter our view or fair value estimate of $110 per share. For the quarter, American Express generated net revenue of $10.8 billion, representing year-over-year growth of 8.4%. Net card fees were particularly strong, accelerating to 17%. However, net interest income continues to be the biggest contributor to top-line growth advancing 13% from last year. This growth in revenue led to $2.07 in GAAP earnings per share. The biggest headwind to American Express' earnings came from higher marketing spend related to the renewal of its Delta partnership. The biggest takeaway from the call is that while economic growth isn't as good as it was in 2018, management isn't seeing any signs of a recession. Total loans grew by 11% from the previous year, continuing American Express' elevated pace of growth. Given this quarter's benign performance, we do not expect any material changes to our $110 per share fair value estimate.

Despite the caution many are expressing with respect to the economy, it’s still fairly hard to see any economic headwinds in American Express' numbers. Billed business from large corporate clients grew 5%, and U.S. small and medium-size business increased billings by 7%. If corporate travel and entertainment spending is a good forward economic indicator, these numbers suggest we're not headed toward a recession. American Express' net write-offs are up 20 basis points from the previous year; however, this appears mostly attributable to the company’s elevated loan growth. We are surprised how little upward pressure American Express' loan growth has had on credit losses, as peers growing at similar rates have seen substantially more pressure.

We found management’s commentary around technology and M&A interesting. This year, the company has purchased LoungeBuddy, Cake Technologies, and Resy. Seemingly, this is an effort to attract millennials. LoungeBuddy is an airport lounge subscription service that charges subscribers a monthly fee to access any of its lounges. Cake is an alternative payment method that allows users to pay their restaurant or bar bill via their mobile device while Resy is a restaurant reservation service that allows users to buy reservations at restaurants where it’s often hard to secure a table. During the quarter, management said that more than 50% of the company’s new card members are either millennials or members of Generation Z.