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Why Investors Are Retaining American Express (AXP) Stock Now

American Express Company AXP is in a favorable position for growth, driven by an upswing in card member spending, increasing volumes and sustained business momentum. The resilience witnessed in consumer spending during recent times, despite macroeconomic uncertainties, inflation and a high interest rate environment, is expected to contribute positively to its performance.

American Express — with a market cap of $120.7 billion — is a diversified financial services company, offering charge and credit payment card products and travel-related services worldwide. Courtesy of solid prospects, this currently Zacks Rank #3 (Hold) stock is worth retaining in your portfolio at the moment.

Let’s delve deeper.

The Zacks Consensus Estimate for AXP’s 2023 earnings is pegged at $11.20 per share, indicating 13.7% year-over-year growth. The estimate has remained stable over the past week. In the long term, the company foresees earnings growth in the mid-teens. American Express beat on earnings in two of the last four quarters and missed twice, with an average surprise of 0.1%. This is depicted in the graph below.

American Express Company Price and EPS Surprise

American Express Company Price and EPS Surprise
American Express Company Price and EPS Surprise

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

The consensus mark for current-year revenues stands at $60.7 billion, suggesting a 14.9% rise from the prior-year reported number. Looking ahead, the company anticipates a continuous revenue growth trajectory, targeting more than 10% in the long run.

Both Billed Business and Processed Volumes are poised for sustained growth, contributing to the overall expansion of network volumes. This will play a major role in top-line growth. Our projection for total network volumes in 2023 suggests year-over-year growth of more than 9%, indicating increased spending.

We expect cards in force for 2023 to jump nearly 8% from a year ago, accompanied by a nearly 13% increase in the average fee per card. The International Card Services segment, as well as the Global Merchant and Network Services unit, are expected to continue witnessing growth, driven by an increase in card member spending and growing network volumes, respectively.

The emphasis on small and medium-sized enterprises positions AmEx for sustained long-term growth. The acquisition of Kabbage is anticipated to play a crucial role in this strategy. Additionally, AXP actively engages in forming partnerships and collaborations to strengthen its digital capabilities, aiming to deliver efficient billing, payment processes and other services for its clients.

American Express' robust return on equity of 30.6% (compared with the industry average of 15.2%) serves as a key indicator of its growth potential. It underscores the company's strategic prowess in effectively deploying shareholders' funds and highlights its financial strength.

Closing the third quarter, the company reported a robust financial position, with cash & cash equivalents standing at $44 billion, marking a significant increase from the $34 billion recorded at the end of 2022. Simultaneously, short-term borrowings remained manageable at $1.6 billion. The company demonstrated strong cash generation, producing free cash flow amounting to $18.6 billion in the trailing 12-month period.

In a commitment to shareholder value, AXP allocated $2.6 billion to share buybacks and distributed common stock dividends of $1.3 billion in the initial nine months of 2023. This underscores the company's dedication to enhancing shareholder returns.

Key Risks

However, there are a few factors that investors should keep an eye on.

Escalating expenses are exerting downward pressure on its margins. Last year, expenses jumped 24.1% year over year. We expect total expenses for 2023 to jump more than 11% year over year due to higher card member rewards, services, business development costs, data processing and equipment costs.

Also, American Express’ 12-month forward price-to-earnings multiple of 13.6X is higher than 12.1X of the industry. This valuation indicates a slightly higher expense relative to industry peers at the current level. Nevertheless, we believe that a systematic and strategic plan of action will drive AXP’s growth in the long term.

Key picks

Investors interested in the broader Finance space can consider some better-ranked companies like Blue Owl Capital Corporation OBDC, StoneX Group Inc. SNEX and Globe Life Inc. GL. While Blue Owl Capital and StoneX currently sport a Zacks Rank #1 (Strong Buy) each, Globe Life has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus mark for Blue Owl Capital’s current year earnings is pegged at $1.91 per share, indicating 35.5% year-over-year growth. Furthermore, the consensus estimate for OBDC’s revenues in 2023 suggests 30.4% year-over-year growth.

The Zacks Consensus Estimate for StoneX’s current year earnings has improved 1.4% over the past month. It beat earnings estimates thrice in the past four quarters and missed once, with an average surprise of 14.4%. Also, the consensus mark for SNEX’s revenues in the current year suggests 19% year-over-year growth.

The Zacks Consensus Estimate for Globe Life’s current year earnings is pegged at $10.60 per share, which indicates 30.1% year-over-year growth. It has witnessed six upward estimate revisions against none in the opposite direction in the past 60 days. It beat earnings estimates in each of the past four quarters, with an average surprise of 2.3%.

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