AmEx Stock: Hold Tight Before the Q2 Earnings Wave

American Express Company AXP is set to report second-quarter 2024 results on Jul 19, 2024, before the opening bell. Growing network volumes, total cards-in-force and interest income are expected to have supported its performance.

The Zacks Consensus Estimate for second-quarter earnings is currently pegged at $3.22 per share, implying solid growth of 11.4% from the year-ago reported number. The estimate was revised upward by two analysts in the past week against no movement in the opposite direction, resulting in an increase of a penny from $3.21 per share. The Zacks Consensus Estimate for second-quarter revenues is currently pegged at almost $16.6 billion, suggesting a 10.1% uptick from the year-ago actuals.

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American Express beat the consensus estimate for earnings in three of the trailing four quarters and missed once, with the average surprise being 6.4%. This is depicted in the graph below:

American Express Company Price and EPS Surprise

American Express Company price-eps-surprise | American Express Company Quote

Q2 Earnings Whispers

Our proven model does not conclusively predict an earnings beat for AmEx this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. That is not the case here.

The company has an Earnings ESP of -0.71%. This is because the Most Accurate Estimate currently stands at $3.20 per share, lower than the Zacks Consensus Estimate of $3.22. AmEx currently carries a Zacks Rank #3.

Factors Shaping Q2 Results

American Express is expected to have seen a rise in network volumes during the second quarter, continuing a trend seen in recent quarters. This uptick is likely attributable to resilient consumer spending, total billed business and processed volumes. The Zacks Consensus Estimate for second-quarter total network volumes indicates 5.1% year-over-year growth from $426.6 billion.

Discount revenues, a key source of revenues for AmEx, are likely to have received support from the resilient consumer spending level. The Zacks Consensus Estimate for second-quarter Discount revenues indicates 5.2% year-over-year growth.

In the second quarter, Travel and Entertainment (T&E) is anticipated to have sustained its growth trend, resulting in increased T&E-related spending. Further, fees, commissions and other revenues are expected to have improved, driven by an upturn in travel-related income. The Zacks Consensus Estimate for the second-quarter International Card Service billed business indicates a 13% improvement from the year-ago period. Also, the consensus mark for Global Merchant and Network Services' pre-tax income indicates a 7.6% year-over-year increase.

Cards-in-force is likely to have witnessed an uptick in the quarter under review due to its expanding product offerings and enhancing mobile platforms improving the customer experience. The Zacks Consensus Estimate for second-quarter total cards-in-force indicates 5.5% year-over-year growth. The consensus estimate for Average Card Member loans also implies a 14% year-over-year increase.

AmEx's interest income, another major revenue contributor, is likely to have risen on higher loan receivables and the high-interest rate environment. The Zacks Consensus Estimate for AXP's total interest income suggests an upside of 22.2% from the year-ago reported figure of $4.8 billion.

The factors mentioned above are expected to have positioned American Express for significant year-over-year growth. However, an increase in expenses, card member services, marketing and salaries are likely to have trimmed margins, somewhat offsetting the positive aspects.

Second-quarter client engagement costs are likely to have increased due to expanding Card Member spending and higher usage of travel-related benefits, along with high rewards and business development costs, making an earnings beat uncertain. Also, a hefty provision for credit losses is likely to have impacted the results. We expect rainy-day funds to have increased in the second quarter.

Price Performance & Valuation

AmEx's stock has exhibited an upward movement, gaining a notable percentage over the year-to-date period. It has jumped 30.3% compared with the industry's rise of 1.1%. In comparison, some of its peers, like Mastercard Incorporated MA and Capital One Financial Corporation COF, have gained 4.1% and 10.3%, respectively, during this time. Additionally, AXP shares have outperformed the S&P 500 Index significantly, which rallied 18.3% during the same period.

YTD Price Performance

Image Source: Zacks Investment Research

Now, let's look at the value AmExoffers investors at current levels.

The company's valuation looks somewhat stretched compared with its own range and the industry average. Currently, AXP is trading at 17.41X forward 12 months earnings, above its five-year median of 15.48X and the industry's average of 13.31X.

Image Source: Zacks Investment Research

In comparison, the payments juggernaut Mastercard is trading at 28.81X forward 12 months earnings. Capital One Financial, on the other hand, is trading at 9.78X, offering a better value at the moment.

Investment Thesis

AmEx's strategic initiatives, such as launching new products, enhancing features of existing ones, modifying prices and forging alliances, have positioned it for long-term growth. So far, resilience in consumer spending and rebounding domestic and international economies have propelled its bottom line. Also, its robust cash-generating abilities are well-liked by investors, through which business investment and shareholder-friendly moves are undertaken. However, the pace of consumer spending growth is not expected to sustain for much longer as pandemic-era excess savings are drying up fast. The slowdown in real disposable income growth is expected to constrain spending in big-ticket items and discretionary areas such as entertainment, travel and dining out, which could limit the stock's short-term performance. Investors should closely monitor these factors.

Conclusion

While AmEx has demonstrated strong year-to-date performance and promising growth prospects, the expected slowdown in consumer spending growth, rising costs, and stretched valuation suggest that a cautious approach is prudent. Monitoring upcoming earnings results closely will be crucial for making informed investment decisions. Current AXP shareholders can maintain their positions, but new investors may want to wait for a more favorable entry point.

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