American Express Stock To Beat Consensus In Q1

American Express (NYSE: AXP) is scheduled to report its fiscal Q1 2021 results on Friday, April 23. We expect American Express
to beat the consensus estimates for revenues and earnings. While AXP, a leading credit card issuer and global payments processor, has surpassed the earnings expectations twice in the last three quarters, its full-year 2020 revenues were significantly lower than the 2019 figure. The company is very sensitive to changes in consumer spending levels, as the card transaction volumes, outstanding card loans, and network transaction volumes are directly linked to it. The consumer spending levels suffered last year due to the impact of the Covid-19 crisis and the economic slowdown. Along with this, the lower interest rate environment further increased its problems. That said, the consumer spending levels have seen some recovery over the recent quarters. Additionally, the company has decreased its provisions for loan losses over the last two quarters on a sequential basis, signaling some improvement in the perceived loan repayment capability of its customers. We expect the same trend to drive the first-quarter FY2021 results as well.

Our forecast indicates that American Express’ valuation is around $130 per share, which is 13% below the current market price of around $149. Look at our interactive dashboard analysis on American Express’ pre-earnings: What To Expect in Q1? for more details.

(1) Revenues expected to beat the consensus estimates in Q1

Trefis estimates American Express’ fiscal Q1 2021 revenues to be around $9.39 billion, 2% above the $9.17 billion consensus estimate. American Express’ reported total revenues of $36.1 billion in 2020 – down 17% y-o-y. This was mainly driven by a 20% y-o-y drop in the non-interest revenues, which contributes around 80% of the total revenues. This could be attributed to lower consumer spending levels and a decrease in fees charged as a % of card transactions that take place with partner merchants (discount rate). Further, the net interest income fell by 7% y-o-y, due to lower outstanding card loans and interest rate headwinds. On the flip side, the consumer spending levels have seen some improvement over the recent months and we expect the same momentum to continue in the first quarter of FY2021.

The travel bans and the Covid-19 related restrictions in 2020 have negatively affected the company, as it has co-branding card arrangements with several hotel chains and airlines. With more and more people receiving the Covid-19 vaccine and expected improvement in the economy, the travel bans are likely to ease and the consumer spending levels are likely to improve over the subsequent months. However, the lower interest rate environment is unlikely to see an immediate recovery. Overall, it will likely enable the AXP’s revenues to touch $40 billion in FY2021. Our dashboard on American Express’ revenues offers more details on the company’s segments.

2) EPS likely to surpass the consensus estimates

American Express’ Q1 2021 adjusted earnings per share is expected to be $1.76 per Trefis analysis, almost 9% above the consensus estimate of $1.61. The drop in 2020 revenues was also evident in the profitability figures – adjusted net income decreased 54% y-o-y to $3 billion. This was primarily due to a sizable build-up in provisions for loan losses to cover the higher risk of loan defaults – up 32% y-o-y from $3.6 billion to $4.7 billion. Further, its operating expenses as a % of revenues increased from 72.4% to 75% driven by higher salaries and employee costs. This reduced the EPS figure from $7.99 to $3.77. That said, American Express has managed to decrease its loan loss provisions over the last two quarters, benefiting its profitability figures. We expect the same trend to continue in the FY2021 Q1 results.

The loan repayment capability is expected to further improve in the year with recovery in the economic conditions and expected success of the Covid-19 vaccination program – so far 220 million Covid-19 vaccine doses have been administered in the U.S. This is likely to further reduce the provisions for loan losses, boosting its profitability figures. It is likely to enable AXP to report an EPS of around $6.84 in FY2021.

(3) Stock price estimate 13% lower than the current market price

Going by our American Express’ valuation, with an EPS estimate of around $6.84 and a P/E multiple of just below 19x in fiscal 2021, this translates into a price of $130, which is 13% below the current market price of around $149.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

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