The views expressed below are those of Anchor Capital Advisors, LLC (‘‘Anchor’’) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.
American Express is a global payments company that engages in the provision of charge and credit card products, as well as travel related services. The company was founded in 1850 and is headquartered in New York, NY.
American Express is not just a credit card company but is also one of the largest global payments companies. It operates in an industry that we believe is growing rapidly due to the global move from cash and checks to credit and charge payments. American Express should also benefit from the growth of e-commerce and digital payments. We believe AXP can significantly grow wallet share of its targets customer base, setting the company up for mid-to-high-single digit topline growth over the medium to long-term.
AXP stock has underperformed the market due to the slowdown in its credit card, travel, and entertainment businesses. The stock has performed in line with credit card issuers due to the concerns about increase in credit-card default rates. However, with a diversified business model and the strength of its balance sheet, we expect AXP to withstand the current market conditions and emerge even stronger.
Confirmation through Research
AmEx is one of the world’s most widely recognized brands with a diversified and differentiated business model. With its integrated payments platform, it is not just a credit card issuer, but also a network (like Visa and MasterCard) as well as a merchant acquirer.
With more than 114 million credit cards in circulation, 60% of S&P 500 companies as customers, and 3x average spent per card vs. cards on other networks, AmEx has an attractive customer base. But the company currently tapping only a fraction of its customer’s share of wallet, AmEx has a significant room for growth.
Total revenue for American Express declined by 29% in Q2 2020, driven by significant slowdown in global consumer and corporate activity. Travel and entertainment, which accounts for approximately 25% of AXP’s revenue, declined by more than 75% in Q2 2020. Offsetting some of the declines in its traditional consumer and corporate credit card spending is the growth in e-commerce and digital payments, with AXP seeing a 70% increase in “card not present” in the last quarter.
Travel and Entertainment has hurt revenue in the last 2 quarters, and arguably, T&E tied to large corporations may not recover for a while. But only 9% of billings are tied to large corporations and the bulk of T&E billings are tied to consumers, which we expect to recover faster. With delay in T&E due to the current pandemic, AXP is shifting its rewards to provide wireless and streaming credits, free shipping, extended travel, and related benefits. They are also looking at more dining and wellness experiences rather than concerts and sports.
One of the reasons we like American Express is the strength of its balance sheet. Despite significant increase in reserves against loans to account for difficult macroeconomic environment, AXP managed to increase its Core Equity Tier 1 Ratio higher to 13.6%. AXP has maintained a very diverse funding mix, and unlike 2008, the company has built a very strong direct deposit base from its existing members. As a result, AXP is able to fund most of its loans from its own deposit base, limiting the need to tap into other short-term funding sources.
We believe American Express stock has performed in-line with credit card issuers and materially underperformed pure play payments companies due to underlying credit risk, as well as, concerns about its Travel and Entertainment Business and credit-card loans. However, with almost half of its recurring operating profit coming from Global Merchant and Network services,  we think the market is under appreciating the value of AXP’s payment business and the strength of its balance sheet.