American Express Company

Moat: 4/5

Understandability: 2/5

Balance Sheet Health: 4/5

American Express is a globally integrated payments company, connecting customers with access to products, insights and experiences that enrich lives and build business success.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

American Express, often referred to as Amex, is a unique player in the payment industry. It operates a closed-loop network where it issues cards and processes transactions, unlike other major players like Visa and Mastercard that rely on third parties to issue cards. This gives it more control over fees and the customer experience.

Business Overview:

American Express operates primarily through the following segments:

  • U.S. Consumer Services (USCS): This segment serves individual consumers with various credit, charge, and loyalty products and related services in the U.S.
  • Global Commercial Services (GCS): This segment offers payment and expense management solutions to corporations of all sizes across various geographies, primarily targeting higher-spending customers.
  • International Card Services (ICS): This segment provides payment solutions to consumer clients and small businesses outside the US.
  • Global Merchant and Network Services (GMNS): The segment that operates American Express’ merchant network, including card acceptance, fraud protection and account management, and also services the Amex global network.

Revenue streams are diverse, primarily derived from discount fees (fees charged to merchants upon processing a transaction), card fees (annual membership fees), service fees, other related fees, interest income on card member loans, and other revenues.

The payments landscape is being influenced by the following trends:

  • Digitization and E-commerce: The rise of online shopping and digital payments continues to accelerate, which is where American Express is already a market leader with its strong presence across digital spending.
  • Competition: New entrants like fintech companies and traditional players continue to intensify competition in the financial services and payments sectors, requiring companies to innovate and provide competitive pricing and value proposition to both merchants and end-consumers.
  • Regulation: The regulatory environment, particularly around banking capital requirements, consumer data protection, and interchange fees, will continue to put added pressure on the profitability of companies in the payment sector.
  • Customer Behavior: Shifting preferences, such as contactless payments, rewards programs, and flexible payment options, are influencing companies to continually adapt their offerings to suit customer needs.
  • Globalization: With global trade continuing to grow, the ability of payments companies to facilitate cross-border transactions will become increasingly more important for both individuals and businesses.

What Makes American Express Different:

American Express stands out for the following reasons:

  • Premium Brand & Customer Loyalty: AXP is a globally recognized and prestigious brand with a history of high customer loyalty, driven by its premium offerings, rewards programs, and an established record of excellent customer service.
  • Closed-Loop Network: By operating a closed-loop network (where it is both the card issuer and the payment network), American Express gains greater control over customer data and transaction revenue streams, as well as the customer experience.
  • Affluent Customer Base: AXP’s focus on premium products caters to higher-spending consumers, which typically makes them less sensitive to macroeconomic downturns. This also allows the company to pursue a higher profit margin than competitors.
  • High Spending on Experiences: While its competitors make money primarily through consumer spending, Amex gets a large percentage of its volume in business spending, and particularly travel expenses, meaning it is more resilient to changes in the demand for consumer goods than its competitors.
  • Scale and Scope: Being a very large company that has operations across different geographies, American Express has economies of scale as well as an extensive network that is very difficult to replicate.
  • Proprietary Data: AXP gathers and analyzes data on its cardmembers spending habits and trends which it uses to gain insights about its customers, allowing to target them more effectively with promotions and offers.

Financial Performance:

Here’s a deeper dive into AXP’s financials, focusing on recent performance:

AXP has provided preliminary guidance for the full year, stating they expect to generate $9.90-$10.40 in adjusted earnings per share and they plan to continue the strategy of attracting more customers and engaging them more intensely. AXP expects revenue to increase between 15% and 17% YoY.

Revenue:

  • Q1 2024: AXP reported a solid increase in revenue, with total revenue of $15.8 billion, a growth of 11% on a YoY basis. The company has seen the strongest rise in U.S. Consumer Services.

Q1 earnings and revenues have shown growth YoY as have network volumes and card member spending, driven by a strong global customer base.

  • Full Year 2023: Total revenue was $60.5 billion, a growth of 17.4% YoY as compared to $51.1 billion in 2022.

Revenue was driven by strong growth in global spending across almost all segments and geographies. American Express is showing success in building a modern digital platform that is capturing a large share of consumer spending. The company’s global infrastructure is also proving to be very resilient.

  • Revenue mix: The revenues have been consistently growing, with a steady and increasing share from international markets. The share of revenue from network services, travel and lifestyle services, and net card fees have also been stable over the past few years.

Earnings:

  • Q1 2024: AXP reported a net income of $2.4 billion. Diluted Earnings per share were $3.33 in the first quarter of 2024, an increase of 22% YoY from diluted EPS of $2.74 in the same period last year.

AXP has increased its profits in the first quarter by managing their operating expenses more efficiently. However, despite that improvement, costs and expenses were higher in 2024 as compared to 2023.

  • Full Year 2023: The company reported an increase of 11.9% YoY in Net income to $8.4 billion compared to $7.5 billion in 2022. The diluted EPS also saw a bump of 14.2% YoY, to $10.07 in 2023.

Profitability:

  • Net Margin: American Express has a high operating profit margin of 20.4% in Q1 2024 due to the company’s ability to command premium prices, largely based on customer loyalty.
  • ROIC: As discussed above, the company enjoys high returns on capital, indicating that its business model is efficient and has strong competitive advantages.

As per the comments by the company management on the recent earnings call, AXP has taken steps to increase earnings by streamlining processes and reducing expenses. The key focus is on strengthening their customer base by offering them superior product and rewards programs.

Balance Sheet Health:

While the company has a solid balance sheet, with a high equity ratio, the long-term debt-to-asset ratio is a source of concern.

  • Cash: AXP reported cash and cash equivalents of $36.8B in December 2023, as compared to 43.2B at the beginning of the year.
  • Long Term Debt: The long term debt of the company was $25B as of December 2023.
  • Debt to Equity: The debt to equity ratio was at 1.4.

As reported in the Q1 2024 earnings report, AXP plans on continued capital investment to fund business initiatives, as well as an increased dividend payouts to the shareholders. AXP has reiterated its plans to maintain the target debt-to-equity ratio, and may look at increasing debt as needed.

Moat Analysis:

AXP has a wide economic moat (4/5) based on:

  • Brand: AXP possesses a premium brand associated with high-end service and exclusivity. Its marketing strategies and loyalty programs have historically generated strong brand recognition and customer loyalty.
  • Switching Costs: For merchants, the benefits of remaining on the AXP network generally outweigh the costs of switching to other payment networks, creating a strong switching cost advantage for AXP. For cardholders, this is based on perks, rewards, and status attached to the cards as well as the inconvenience of switching.
  • Network Effects: Being a closed loop payment system, American Express is a classic example of a company benefitting from the positive network effect. As more customers use AXP, the more merchants are likely to accept it, and vice versa.
  • Niche Markets: AXP is a leader in high spending markets and enjoys high profit margins, especially with corporate credit cards.

Risks To The Moat & Business Resilience:

Despite its strong competitive position, American Express does face a number of risks that could damage its moats:

  • Technological Disruption: Fintech companies and new technologies are rapidly changing the payment space and can potentially erode some of Amex’s advantages. The company, however, has also adopted and been implementing strategies that will help it stay competitive in the fintech space, such as digital payment options and better technological infrastructure.
  • Competition from Other Payment Networks: Visa and MasterCard have larger acceptance networks than AXP and they are becoming increasingly accepted, posing a threat to AXP by becoming a viable alternative that can cause market share erosion for American Express.
  • Economic Downturn: Consumer spending, which is a major portion of revenue for AXP, will typically decline during an economic contraction, causing lower transactions and higher default rates. The company may face pressure from high-end business travellers who reduce their travel budgets.
  • Regulatory Changes: Changes to regulations related to interchange fees, consumer data privacy, and other areas may erode the revenue or competitive advantage of AXP.
  • Increased Promotional Expenses: To keep the business growing, the company would need to spend increasing amounts of money to retain existing customers and attract new ones, which may affect the earnings and profits of the company.
  • Cybersecurity Risks: Data breaches and cyberattacks could erode the brand reputation and damage customer relationships of the company. As such the company needs to increase its financial allocation for risk management and data security.
  • Geopolitical Risks: Unpredictable changes in the geopolitical climate, especially given the company’s strong global presence, may cause it considerable operational and logistical challenges that may prove a threat to the overall business.

American Express has shown resilience through economic cycles due to a large loyal and wealthy customer base. It is also improving its revenue streams across different sources which helps it mitigate losses on any single source. The company also is actively trying to manage its brand image as it continues to innovate into new areas. These factors will provide resilience to AXP going forward, but AXP also needs to focus on expanding its moats and building defensible advantages.

Understandability Rating:

The complexity in AXP’s operations and financials make it moderately difficult for non-experts to completely understand the business model and its nuances-especially to understand its impact on the overall valuation of the company (2/5)

Analyzing financial statements for banks is very difficult and usually involves a detailed accounting knowledge and a deep understanding of financial markets and how they operate. Many of these terminologies used in this document is highly complex for a person who doesn’t have any experience in the world of finance and accounting.

Balance Sheet Health Rating:

AXP currently has a fairly healthy balance sheet given its decent net cash position and strong revenue growth, with some concerns regarding its overall debt levels that have been on the higher side in recent times, but a manageable leverage (4/5)

The company is continuing to grow and has to reinvest its cash flows, at the same time the company has to pay its customers, increase its rewards programs, which all have an impact on the debt levels. Though the current balance sheet may be healthy, it requires monitoring from the investor in the coming years.