says it has a premium customer. Does that mean it should trade at a premium multiple?
With a potential recession still looming, some lenders are talking about credit risk that might start to exceed levels seen prior to the pandemic. Not so for American Express. While on its quarterly earnings call on Friday it said it anticipates write-offs to move higher in 2023 from unusually low levels last year, it is now currently reserving for credit losses representing 2.4% of total loans and card-member receivables. That is below where reserves started at the beginning of 2020, at 2.9%, after new loan-loss accounting rules had kicked in but before the pandemic had.
The company says this is thanks to the “premiumization” of its customer base over the past couple of years, which it expects to lead to better credit performance. About 70% of newly acquired accounts last year were on fee-paying products, and 2022 was a record year for new additions of U.S. consumer Platinum and Gold card customers. And while this group is “not immune to economic downturn,” its behavior so far has been to keep up its spending habits, the company said. “This is a premium card member base that appreciates premium products and is spending,” Chief Executive
told analysts on Friday.
Spend those customers did: Amex revenue was up 25% in 2022, as was billed business that tracks spending volume. That revenue growth is guided to slow in 2023, to around 15% to 17%, in part because of tougher prior-year comparisons, like to the big jump in cross-border travel spending in 2022. But Amex is still anticipating double-digit growth over the long haul, which at its size would put it in rare air in banking and lending.
With that backdrop, American Express is trading at a far higher earnings multiple than peers. After a more-than 11% jump in its share price on Friday following earnings, Amex is now trading at over 16 times forward earnings. Banks and consumer-finance companies in the S&P 500 overall are trading closer to 10 times. Amex is usually at a premium among banks, but this gap is well above its 10-year average, according to FactSet.
Yet Amex isn’t yet trading out of line with its historical valuation relative to the broader S&P 500, to which it is still slightly discounted. On that basis, Amex may have room to run: Prior to 2015, when Amex said it would end its
relationship and investors were questioning its strategy, it traded at a valuation premium to the broad-market index.
Its valuation might expand as investors become even less skittish about credit risk. But some investors’ hurdle to a higher multiple may be on the cost front. Amex’s expenses rose 24% in 2022, nearly matching its revenue growth. Card-member services expenses rose 48%, and card-member rewards expenses were up 27%. Premium card members carry premium costs, too.
The firm believes it will see increasing efficiencies after a big investment push to be able to handle its new scale. For example, younger, more engaged customers will naturally draw in more promotional partners, naturally leading to more engagement. It does have some macroeconomic cost pressures in the year ahead, like from rising interest rates that will increase its funding costs.
But if the company can show continued core spending progress, including on marketing and operating costs, then it might come to be treated as reverentially as its customers.
Write to Telis Demos at Telis.Demos@wsj.com
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