American Express (AXP) getting swiped as credit concerns cloud over strong spending
2:27 pm Friday, October 21st, 2022
Bolstered by resilient spending from its cardholders, American Express (AXP) edged past 3Q22 earnings expectations and lifted its FY22 EPS guidance higher, stating that it now expects to exceed its prior outlook for EPS of $9.25-$9.65. Staying true to recent form, the quarter was marked by robust travel and entertainment (T&E) spending, which increased by 57% yr/yr, with international T&E spending volumes exceeding pre-pandemic levels for the first time. Furthermore, AXP’s strategy to win in the younger Gen Z and Millennials demographics continues to pay off as 60% of its 3.3 mln card acquisitions in Q3 were derived from those age groups.
Despite these achievements, the stock is trading sharply lower and is displaying notable relative weakness today. We believe there are few explanations for AXP’s weakness.
The degree of EPS upside in Q3 was considerably lower than the past several quarters. Total expenses were up by 19% to $10.3 bln, reflecting higher customer engagement costs and the redemption of travel-related benefits. These are essentially customer acquisition costs that take some of the luster off AXP’s card membership growth. However, it’s notable that operating expenses slightly decreased on a qtr/qtr basis.
More concerning than the yr/yr increase in operating expenses is AXP’s increase in provision for credit losses, which weighed on earnings. After setting aside $410 mln last quarter for customer defaults, AXP significantly bumped its provisions up to $778 mln in Q3. That’s the highest total since the pandemic-impacted quarter of 2Q20, when AXP reported provisions for credit losses of $1.56 bln.
CEO Stephen Squeri offered a reassuring tone, stating that AXP’s credit metrics remain strong as card spending remains at near record levels. That is currently the case, but one potential red flag is that loans 30+ days past due as a percentage of total is inching higher. Specifically, that rate ticked up to 0.9% in Q3, following four consecutive quarters at 0.7%. For context, that delinquency rate during the height of the pandemic in 1Q20 was 1.9%.
AXP took a conservative approach with its FY22 revenue guidance, choosing to reaffirm its outlook for growth of 23-25%, rather than nudging it higher. Analysts’ estimates were calling for revenue to increase by slightly more than 25%. The shortfall suggests that AXP is becoming a little more cautious about the consumer spending environment.
It was another solid quarter for AXP that featured healthy card spending, which should bode well for Visa (V) and Mastercard (MA) when they report earnings next week. The issue, though, is that worries about credit quality and loan defaults are reaching a fevered pitch as interest rates rise and as inflation pinches consumers’ pocketbooks. Accordingly, even the smallest crack — such as a minor uptick in 30+ day delinquencies — can cause investor confidence to fall.
