'A shift towards trying to increase millennial & Gen Z signups': Miller on American Express

Key Concepts

• Discount Revenue: The fees merchants pay to American Express for accepting their cards. A key indicator of spending volume.
• Net Interest Income (NII): The difference between the interest American Express earns on loans and the interest it pays on deposits.
• Net Charge-Offs: The amount of debt American Express deems uncollectible. A measure of credit risk.
• Affluent Gen Z/Millennials: The target demographic shift for American Express, focusing on younger, higher-income individuals.
• Credit Card Cap: Proposed government regulation limiting the interest rates credit card companies can charge.
• Valuation: Assessing whether a stock's price accurately reflects its intrinsic value.

American Express Earnings Analysis: A Detailed Breakdown

I. Earnings Reaction & Market Expectations

American Express (MX) shares are experiencing downward pressure despite reporting revenue that exceeded expectations and a 16% dividend increase. This negative market reaction stems from the company failing to meet profit expectations, a consequence of exceptionally high market expectations built on American Express’s consistent strong performance within the credit card industry. The market anticipated substantial results, particularly given the impressive discount revenue growth already observed.

II. Dividend Increase & Competitive Positioning

The decision to raise the dividend by 16% reflects American Express’s confidence in its future performance. This confidence is rooted in the company’s strong leadership position within the US luxury credit card market. MX is acquiring new cardholders at a rate exceeding general population growth, indicating successful market share gains. Furthermore, the recent increase in the annual fee for the Platinum card (to $900) is projected to significantly boost annual card fee income in the coming year. As Michael Miller, equity analyst at Morningstar, stated, “they’re kind of in this competitive driver seat and they’ve got reason to believe that revenue next year will be strong as well.”

III. Demographic Shift: Millennials & Gen Z

A notable trend is the increasing proportion of spending on American Express cards coming from Millennials and Gen Z consumers, now representing the largest segment of US cardholders. This shift is the result of a deliberate strategic transition by the company, moving away from its historical focus on older, wealthy, travel-oriented customers. Since the pandemic, American Express has actively targeted younger demographics, and this strategy is now manifesting in spending patterns. Miller noted, “you’re finally starting to see the effect of that in terms of the spending breakdown for the company.”

IV. Targeting Affluent Younger Consumers & Risk Assessment

While expanding its reach to younger consumers, American Express maintains a focus on the affluent segment within those demographics. The high annual fee for the Platinum card ($900) exemplifies this strategy. A potential risk associated with increased lending on American Express cards is a rise in net charge-offs. However, so far, this has not materialized, and the strategy has been a key driver of success over the past three to four years. Miller emphasized, “it’s something to keep an eye on, but so far this strategy has gone extremely well for them.”

V. Impact of Proposed Credit Card Cap & CEO Stance

The potential implementation of a 10% credit card cap proposed by former US President Donald Trump has drawn criticism from American Express CEO Stephen Squeri. While a cap would negatively impact American Express, the effect would be less severe compared to other credit card issuers. This is because American Express derives only 25% of its revenue from net interest income, and its cardholders generally have higher credit scores, resulting in lower credit card yields. Miller explained, “American Express is still a spending focused credit card company…they would be substantially less hit.” He also acknowledged that while there would be a hit to revenue and earnings, it would be less impactful than for peers.

VI. Fiscal Year Outlook & Performance Analysis

The analyst anticipates a strong performance for American Express for the remainder of the fiscal year, particularly building on the positive momentum from the latter half of the year. Initially, lower spending volume growth was offset by strong net income and card fee growth. However, as the year progressed, discount revenue increased at a faster rate, and spending per card also rose. Miller concluded, “it was a good year for American Express and honestly a little better than the kind of just topline bottom line numbers would suggest.”

VII. Sector Comparison & Valuation

Within the broader financial sector, Miller suggests that consumer finance companies, including American Express, are generally overvalued. He favors Capital One over American Express primarily due to valuation concerns, while acknowledging that American Express is a higher-quality company but commands a premium price. He stated, “I lean a little more towards Capital One primarily in valuation concerns with the caveat that if you’re just looking at competitive position and credit risk and Mer Express is just is a higher quality company. You’re just paying a premium for it.”

Conclusion

American Express is navigating a period of strategic transition, successfully attracting younger, affluent consumers while maintaining its core strengths in the luxury credit card market. While short-term market reactions to earnings may be negative, the company’s strong competitive position, revenue diversification, and proactive risk management suggest a positive long-term outlook. However, investors should be mindful of the current valuation and consider alternative options within the financial sector, such as Capital One, for potentially better value.