AXP Stock Forecast: Transforming Consumer Base

Sergey Okun  This AXP stock forecast article was written by Sergey Okun – Senior Financial Analyst at I Know First, Ph.D. in Economics.

Highlights

  • American Express securing the Apple Card partnership from Goldman Sachs.
  • AXP’s ROE is 31.14%, higher than 94.55% of the companies in the Credit Services industry
  • The stock recommendation is a “Hold”.
(Source: flickr.com)

Overview

American Express Company (AXP) is a diverse financial services company providing global charge and credit card products, along with travel-related services. It operates as a bank holding company and offers various services such as business travel through its joint venture, American Express Global Business Travel. The company’s products include charge cards, credit cards, payment and financing options, merchant services, network services, and travel-related services.

The Strong Player in the Financial Services Market

The company aims to boost its leadership in the premium consumer sector by providing diverse membership benefits, expanding its global network of business partners, and creating compelling experiences for high-spending customers. It also seeks to strengthen its position in commercial payments through innovative card offerings, differentiated corporate cards, and new financial solutions for businesses. American Express is committed to reinforcing its global network, enhancing merchant acceptance, providing fraud protection services, and collaborating with partners for expanded product offerings. Ultimately, the company strives to leverage its unique global position and business model to achieve its strategic objectives. The net income reached $6,441 million for the nine months ending on September 30, 2023, reflecting an 8.40% increase compared to the same period in 2022.

(Figure 1: The revenue structure of American Express Company)

The total revenue increased by 15.59% for the nine months in 2023 compared with 2022, reaching $44,716 million. Discount revenue holds a dominant position, constituting around 55% of the revenue structure. This revenue represents the amount the company earns and retains from the merchant, payable for facilitating transactions between Card Members and merchants on payment products issued by American Express. It increased in both three- and nine-month periods, mainly due to increased billed business.

Net card fees increased in both periods, driven by growth in the premium card portfolios. Service fees and other revenue grew in both periods, primarily from foreign exchange-related revenues tied to Card Member cross-currency spending and increased delinquency fees. Processed revenue increased in both periods, mainly due to higher network partner volumes. This was partially offset in the three-month period by a decrease in volumes linked to the decommissioning of one of the alternative payment solutions.

Interest income increased in both periods, driven by higher interest rates and growth in revolving loan balances. Interest expense also increased in both periods, primarily due to higher interest rates on customer deposits.

*Source: GuruFocus.com
(Figure 2: AXP vs Credit Services Industry in TTM)

According to GuruFocus, AXP demonstrates strong performance among Credit Services companies. The company achieves an impressive Return on Equity (ROE) at 31.14%, surpassing that of 94.55% of companies in the industry. While the net margin may not appear as impressive, what is more crucial is the Free Cash Flow margin, which, unlike net income, offers a more transparent view of the company’s performance. The company utilizes two sources to distribute funds among shareholders: dividends and buyback. For the nine months ending on September 30, 2023, American Express Company returned $3.9 billion to its shareholders. In 2022, the company returned $5 billion for the full year

American Express potentially securing the Apple Card partnership from Goldman Sachs is a crucial opportunity. Winning the Apple Card partnership would be significant for American Express, exposing it to spending from the key Gen Z demographic. The collaboration aligns with American Express’ efforts to connect with a younger, tech-savvy consumer base, leveraging the company’s appeal among millennials and Generation Z, who are increasingly integrated into the Apple ecosystem

Stock Valuation

American Express, with a growth rank of 8 and a consistent dividend payment, makes it suitable for implementing the Dividend Discount Model (DDM) to value the company’s stock.

(Figure 3: AXP Financial Data)

I have made the next assumptions and estimations for the model:

  • growth rate (g) is an average g based on ROE and the retantion ratio from 2012 to 2022
  • Beta is 1.23 is calculated by five years monthly logarithm return
  • the risk-free rate is 3.5%
  • risk premium is 2.26% based on the average implied premium for the DDM from 2012 to 2022
(Figure 4: AXP Stock Valuation)

According to valuation, the stock should be valued at $186, which corresponds to the current market price of $186.32 on January 3, 2024. The estimate for 2024 is $191. Thus, we can conclude that the stock is correctly valued by the market, and our recommendation for investors is hold.

AXP Stock Forecast: What are Other Analysts Saying?

Based on data sourced from Yahoo Finance, the analyst consensus aligns with the valuation. The overwhelming majority of analysts rated the stock as Hold (57.14%) or Strong Buy (21.43%), with the remaining analysts (14.29%) ranking the stock as Buy, and the average price target is $179.18.

Piotroski F-score is a number between 0 and 9 that is used to assess the soundness of a company’s financial position.

A score of 5 indicates that the company’s financial situation is typical for a stable company, supporting our conclusion to hold AXP stock.

Conclusion

American Express is a stable and mature company in the financial industry taking steps to rejuvenate its current consumer base through potential collaboration with Apple. With a consistent payment history of distributing money to its shareholders, we estimate its stock value at $186, corresponding to the current market value. Thus, the recommendation for investors is to hold.

It is worth paying attention that the stock-picking AI of I Know First has a high buy signal on the one-year AXP stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

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Please note-for trading decisions use the most recent forecast.