American Express is a credit and debit card finance company that provides business travel services. The company is headquartered in New York. American Express, one of the largest banks in the United States, derives most of its revenue from foreign operations rather than domestic ones. The company also provides marketing services for trade organizations, payment processing, and the main functions of a financial sector company. American Express operates in three main segments. The Global Consumer Services Group produces a wide range of proprietary consumer cards that allow citizens of different countries to travel freely worldwide.
At the same time, American Express cardholders have the opportunity to receive additional travel-related services, including insurance, air tickets, hotel and restaurant reservations, and many others (About American Express, n.d.). According to analysts, successful reporting, undervaluation, and other fundamental factors drive American Express stocks (Dunn, 2020). For a more detailed analysis, one’s should familiarize with its financial performance over several years, the primary relationships, and predict prospects.
Current Financial Analysis
The American Express network is characterized by comprehensive coverage. There are 115 million American Express-branded cards in circulation worldwide, and the total annual volume of payments exceeds $ 1 trillion. Against the backdrop of recovery in business and consumer activity in the United States and the world and increased spending on cards, American Express showed strong financial results in the second quarter, showing significant growth in revenue and profit. With the rise in vaccinations worldwide, countries should be expected to open up, and the travel and entertainment landscape, where American Express is firm, should be expected to improve (Macrotrends, 2021).
American Express directs significant funds to shareholders through dividends and share repurchases. Meanwhile, these positives have already been factored into the price of American Express shares, and their upside potential from current levels looks limited.
The study said that the net income of American Express for the fourth quarter of last year fell from $ 2 billion, or $ 2.23 per share, a year earlier to $ 1.7 billion, or $ 2.1 per share. Meanwhile, at the end of 2019, net profit increased from $ 6.3 billion to $ 6.8 billion, and earnings per share amounted to $ 8 with an average market forecast of $ 7.95 per share. Revenue in the reporting period increased from $ 40.3 billion to $ 43.6 billion, in line with analysts’ forecasts (Dunn, 2020). It is noteworthy that in 2019, after many years of trying, American Express caught up with its key competitors in the face of Visa and Mastercard in coverage.
Thus, according to the results of last year alone, American Express-branded stickers appeared on the facades of about 1 million American stores, meaning that customers can pay for their purchases with the cards of this company. The earnings per share of American Express have shown steady growth since the second half of 2017, while the forecast for the coming reporting periods looks more than optimistic, analysts believe (Macrotrends, 2021). As for the dynamics of revenue, a similar picture is observed here; only a systematic growth of the indicator has occurred since the second quarter of 2017.
Comparing American Express’s major multiples with the median among significant competitors and the financial sector allows analysts to conclude that the issuer in question is significantly undervalued on most indicators, especially on P / E indicators, which increased by more than 140%. Studies have shown that American Express stocks outperform the S&P 500 in growth rates (Dunn, 2020). Over the past twelve months, the company’s securities have brought 30%, while the above index rose by 23%. Successful quarterly reports, undervaluation of shares compared to competitors, and other fundamental factors favor the further growth of American Express securities.
A significant driver of profit growth was a sharp drop in credit risk costs, which in turn was due to the release of provisions for possible losses on loans for $ 867 mn due to improved forecasts for the outlook for the global economy. This fact can be attributed to positive and related to short-term financing, which impacts the future success of the company. The volume of assets of American Express at the end of the second quarter was $ 187 billion, decreasing by 2% YTD and by 1% in annual terms.
The volume of issued card loans increased by 5.9% in the first half of the year, to $ 72 billion, while the volume of deposits decreased by 2.3% to $ 85 billion, $ 3.9 billion, or 5% of all loans issued, up from $ 5.2 billion, or 7.4%, at the beginning of the year (Macrotrends, 2021). Nevertheless, the indicator is still significantly higher than the value at the beginning of 2020, when the coronavirus pandemic had not yet hurt the global economy.
The business outlook for American Express is quite optimistic, and the above information proves that the company is financially healthy and that no additional information is required. As vaccinations continue to grow and significant monetary and fiscal stimuli persist in leading countries, the global economic recovery continues to gain momentum, despite specific difficulties associated with the spread of new, more dangerous strains of coronavirus. American Express will continue to be one of the primary beneficiaries of this trend.
On the other hand, travel and entertainment payments are recovering at a noticeably slower rate, especially outside the United States, where vaccinations are slower, and many countries maintain restrictions on cross-border travel. Nevertheless, the figure has already reached 70% of the pre-crisis level, while the company previously predicted that this would happen only by the end of 2021. American Express expects the volume of payments related to travel and entertainment to recover to 80% of the pre-crisis level in the 4th quarter of this year.
In conclusion, the company is relatively stable in the financial sector market. Despite the pandemic, which impacts all business areas, the company is already recovering some financial indicators in specific segments, which allows declaring good prospects. The company’s dividend payments are growing; American Express also buys back its shares quite often, giving a reasonable profit for the future. As a result, it can be concluded that given the liquidity, the company has excellent prospects, within which growth is expected, despite the current global problems. Financial indicators are stable, which is very indicative for shareholders.
The company is attractive for investment, however, further positive growth may be limited due to the fact that, according to experts, the company has already exhausted most of its potential. Nevertheless, American Express is still waiting for a recovery in the tourism sector, which is now reflected in financial investments in marketing, so shareholders will keep them, and for new investors, the level of attractiveness will remain high.
About American Express. (n.d.). Web.
Dunn, T. J. (2020). American Express Financial Reviews: What You Need to Know. Web.
Macrotrends. (2021). American Express Financial Ratios for Analysis 2005-2021 | AXP. Web.