A somewhat quiet turnaround for American Express (NYSE:AXP) has done wonders for American Express stock. The company actually closed at an all-time high on Wednesday and at that point had doubled from early 2016 lows.
But it hasn’t exactly been a torrid run of late. American Express was up just 3.7% YTD before falling in after-hours trading after missing Street consensus for revenue in its Q2 results. Resistance has held repeatedly at about $102 and has done so again.
To be sure, Q2 numbers look reasonably strong, and American Express stock remains rather cheap. Management pointed to the high end of full-year EPS guidance of $6.90-$7.30, suggesting just a 14x P/E multiple.
Still, there are long-running concerns here and some risks highlighted in the Q2 numbers. American Express has done a nice job over the past couple of years, but earnings suggest the run here might be stalling out.
Q2 Earnings and American Express Stock
There’s certainly a case that investors are overreacting to the earnings report with the after-hours sell-off. (AXP dropped 2.75%.) There’s good news here.
Revenue did miss Street expectations – but by $50 million, or about half a percentage point. Revenue of just over $10 billion rose 10% year-over-year – and the strength was broad-based.
Consumer revenues net of interest expense rose 12%, due to higher loans, higher spending, and higher fees. In Global Commercial Services, the top line rose 8% y/y, due mostly to higher spending.
Merchant and Network Services was the biggest disappointment, posting just 1% growth due to a lower discount rate.
On the earnings side, the headline news seems pretty good. EPS of $1.84 beat the Street by $0.02, and rose 25% year-over-year. But it’s on that front that investors seem concerned, particularly relative to loss provisions and charge-offs. Loss provisions company-wide rose a whopping 38% year-over-year. The charge-off rate rose to 1.8% from 1.5% the year before.
Management insisted that the rise was expected. With AmEx moving more toward the Visa/Mastercard model in allowing for revolving balances, it makes sense that the figures are increasing. Given that loss provisions rose 35% in Q1, the Q2 numbers don’t necessarily look like a surprise. But it seems clear, at least initially, that investors are uncomfortable with how fast they’re rising.
Is American Express Stock a Buy?
There’s certainly a case for buying the dip in American Express stock. Again, the stock looks cheap on an absolute basis and much cheaper than peers V and MA. Financials as a whole have been quiet this year, but a strong economy could drive more upside in the sector and for American Express itself.
But there are some reasons for worry as well. American Express continues to be the highest-priced option for merchants in an industry where competition is likely to push prices lower.
In the short term, technically, $102-$103 has presented a hard ceiling for most of this year, and American Express took a big dip in January, during the market correction. Clearly, the market has been more cautious toward American Express in 2018 – and Q2 earnings might add to that caution, and keep a hard ceiling on American Express going forward.
As of this writing, Vince Martin has no positions in any securities mentioned.