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American Express has been on a tear. Shares in the credit card group have gained 75 per cent since late October, handily topping the S&P 500’s 35 per cent advance. The stock trades on a forward price-to-earnings ratio of 18 times, more than twice that of rivals Synchrony Financial and Discover Financial Services. JPMorgan Chase, Wells Fargo and Bank of America — all of which have a big credit card business — are on about 11 times.
Amex’s premium reflects its focus on more affluent consumers and business travellers. But even high-income consumers are not immune to pressures. Amex’s billed business — a measure of how much cardholders are spending on its cards — grew 5.5 per cent year on year to $388.2bn during the second quarter. That was weaker than expected and slower compared with previous quarters.
Given the high expectations baked into Amex’s stock price, any weakness was bound to disappoint investors. Plans to boost its marketing spending by 15 per cent to $6bn this year have also raised eyebrows. But concerns are misplaced. There are still plenty of reasons to hold on to Amex shares.
Few banks have gone harder after the premium market than Amex. In recent years it has taken that same energy and gone after a younger demographic, with much success. Gen Z and millennials accounted for a third of Amex’s US consumer billed services during the second quarter. Spending by the group was up 13 per cent year on year, outpacing the increase reported for Gen X and baby boomers.
Having a younger and more affluent user base means Amex remains a relative haven from the pressure faced by low-income borrowers. Whereas the latter may miss payments when their finances are stretched, wealthier customers may skip a restaurant outing or a weekend trip to save some money.
At Amex, borrowers at least a month behind in their card payments dipped to 1.2 per cent from 1.3 per cent in the first quarter. The net write-off rate on card-member loans and receivables was unchanged at 2.1 per cent. Both figures are below pre-pandemic levels. At Synchrony, the same figures were 4.5 per cent and 6.4 per cent during the second quarter.
The fight for big spending cardholders will only intensify. Amex’s plans for higher marketing to defend its turf are more than manageable, funded out of better than expected performance. One-quarter of softer spending growth should not distract from the bigger picture: don’t underestimate the spending power of Gen Z and millennials.