American Express Blows Past Earnings Estimates, and There’s More to Come

The light is finally shining at the end of dark tunnel of the pandemic for American Express (NYSE:AXP). The premium credit card company took a wallop while its customers took a break from their travel and entertainment spending, but it shifted gears to spur spending in other areas. A slow and steady climb back up turned into a huge recovery in the second quarter, and there’s a lot to be excited about for the future.

Eager to spend again

American Express’ revenue increased 33% year over year in the second quarter to $10.2 billion, almost matching 2019 levels. The company posted a profit, growing nearly 800% year over year to $2.3 billion. Some $866 million of that was released credit reserves as a result of improved creditworthiness.

A person sitting at a table in a restaurant and holding up a credit card to a terminal being held by a server.

Image source: Getty Images.

Goods and services spending increased 31% year over year and was 16% above 2019 levels. It accounted for 82% of the total. Travel and entertainment (T&E) spending was still 42% below 2019 levels, but it increased 340% from Q2 2020, and it made up 18% of the total. In the 2020 fourth quarter, right before the pandemic hit, T&E spending was outpacing non-T&E spending, and it typically represents a key spending category for American Express customers.

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The good news is U.S. spending is back in the positive — 53% above 2020 levels and 3% above 2019 levels. That’s a positive sign for how the total global recovery might look as international regions open.

The refresh is key to near-term growth

American Express is a leader in rewards cards, and it brings in new customers and satisfies existing members through its large and varied rewards program. Developing new and improved programs is central to its growth strategy.

Millennial and Generation Z customers powered growth in Q2, with total spending up 30% over 2019 levels for this group, and American Express is intent on bringing in a younger clientele that will lead growth into the future. On the earnings call, CEO Stephen Squeri said, “A great example of our approach to innovation is our strategy for regularly refreshing our unique value propositions by leveraging our digital ecosystem and our diverse network of partners.”

Squeri said that one of the company’s edges is its willingness to improve even while it’s at the top of its game, and to that end, it offered a “refresh” of the platinum card that launched in July while acquisitions were at a record high. Part of that is offering more lifestyle perks to meet new customer preferences, and it also amplified travel benefits to encourage spending in that category. The last refresh resulted in doubling the customer base for the platinum card, and even with a fee hike, management is confident in its exclusive offerings being a catalyst for new member acquisition and member retention.

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The long-term outlook remains vibrant

Spending might still be taking a breather, but credit card holders are holding on to their cards and joining in high numbers. U.S. platinum cardholders reached a record number, and there were 2.4 million new proprietary cardholders. Cardmember retention exceeded pre-pandemic numbers. Card fees represented 13% of total revenue in Q2, and they also increased 13% as the company acquired new members and kept existing ones.

Management discussed its original growth targets for 2020, and it expects earnings per share to reach the high end of that forecast, or $9.25, in 2022. CFO Jeff Campbell said there were three main drivers of that goal: volume, which is increasing; credit trends, which are improving; and marketing investments to grow, such as the platinum card refresh and capturing a younger demographic.

American Express stock has been building momentum as the company recovers, and it has gained roughly 80% over the past year at recent prices.

AXP Chart

AXP data by YCharts.

Investors should expect more gains and stability from this financial stock as it acquires more customers and spending returns.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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