Company Overview
American Express Company (AXP) has long been a dominant force in the global payments industry, carving out a unique niche by catering to the needs of affluent consumers and businesses. With a storied history spanning over 170 years, the company has weathered numerous economic cycles and adapted to shifting market dynamics, demonstrating its resilience and ability to deliver consistent value for its shareholders.
Historical Background
Tracing its origins back to 1850, American Express began as an express mail business in Buffalo, New York, providing courier and banking services, and transporting valuables such as money, securities, and other high-value cargo. In 1857, the company expanded into the money order business, which became a significant part of its operations. During the American Civil War, American Express played a crucial role in facilitating the movement of cash, securities, and other valuable goods for the Union Army, which helped solidify its reputation as a leading financial services provider.
After the war, American Express continued to grow its money order business and expanded into new services, introducing travelers' checks in the late 19th century. In the early 20th century, the company made a strategic shift by branching out into charge cards, issuing its first charge card in 1958. This marked a major transition from a freight forwarding and banking business to a credit card issuer and payments network, which quickly became the company's primary focus and driver of growth in subsequent decades.
Business Segments
Today, American Express operates through four primary business segments: U.S. Consumer Services (USCS), Commercial Services (CS), International Card Services (ICS), and Global Merchant and Network Services (GMNS). The company's diverse portfolio of credit and charge cards, payment processing solutions, and travel-related services caters to a broad customer base, ranging from individual consumers to large multinational corporations.
The USCS segment issues a wide range of proprietary consumer cards and provides services to U.S. consumers, including travel and lifestyle services as well as banking and non-card financing products. It also manages American Express's dining platform that provides digital tools for restaurants and reservation booking for diners.
The CS segment issues proprietary corporate and small business cards and provides services to U.S. businesses, including payment and expense management, banking and non-card financing products. It also issues proprietary corporate cards and provides services to select global corporate clients.
The ICS segment issues proprietary consumer, small business and corporate cards outside the United States. It provides services to international customers, including travel and lifestyle services, and manages certain international joint ventures and loyalty coalition businesses.
The GMNS segment operates a global payments network that processes and settles card transactions, acquires merchants and provides multi-channel marketing programs and capabilities, services and data analytics, leveraging American Express's global integrated network.
One of the hallmarks of American Express's success has been its ability to maintain a strong focus on its premium customer base. By offering a suite of feature-rich, high-annual-fee cards, the company has cultivated a loyal following of affluent customers who value the exclusivity, benefits, and personalized services that come with an American Express card.
Financial Performance
This strategy has translated into robust earnings, with the company reporting annual net income of $8.37 billion and annual revenue of $60.36 billion for the fiscal year 2023. The company's operating cash flow (OCF) for 2023 was $18.56 billion, with free cash flow (FCF) of $17.00 billion.
In the most recent quarter, Q3 2024, American Express reported revenue of $16.64 billion, up 8% year-over-year, and net income of $2.51 billion, up 2% year-over-year. The increase in revenue was driven by a 4% increase in Discount revenue, an 18% increase in Net card fees, and a 16% increase in Net interest income. However, the company saw negative OCF of $1.81 billion and negative FCF of $2.27 billion for the quarter, primarily due to higher Card Member loans outstanding.
Looking at segment performance for Q3 2024: - USCS reported total revenues net of interest expense of $7.94 billion, up 10% year-over-year, with pretax income of $1.66 billion, up 5% year-over-year. - CS reported total revenues net of interest expense of $4.0 billion, up 7% year-over-year, with pretax income of $908 million, up 7% year-over-year. - ICS reported total revenues net of interest expense of $2.94 billion, up 11% year-over-year, with pretax income of $455 million, up 18% year-over-year. - GMNS reported total revenues net of interest expense of $1.85 billion, relatively flat year-over-year, with pretax income of $991 million, up 1% year-over-year.
Geographically, American Express operates in approximately 130 countries globally. In Q3 2024, the ICS segment saw billed business growth of 13% year-over-year, outpacing the 6% growth in the USCS segment. The strongest international growth was seen in Japan at 17% and Mexico at 15% on an FX-adjusted basis.
Risk Management
American Express's financial performance has been underpinned by its disciplined approach to risk management and credit quality. The company's net write-off rate for card member loans stood at a low 1.9% as of Q3 2024, a testament to its ability to attract and retain high-quality customers.
Liquidity
This, coupled with the company's strong liquidity position, with a Common Equity Tier 1 (CET1) ratio of 10.7% as of the third quarter of 2024, provides a solid foundation for continued growth and innovation. As of September 30, 2024, American Express reported cash and cash equivalents of $47.92 billion and a debt-to-equity ratio of 1.85. The company also maintains several undrawn credit facilities, including a $4 billion committed syndicated bank credit facility maturing in October 2026, and two $3 billion committed revolving secured borrowing facilities maturing in July and September 2026, respectively.
Digital Innovation
Recognizing the evolving needs of its customer base, American Express has been diligently investing in its digital capabilities and product portfolio. The company has made strategic acquisitions, such as the purchase of Resy, a leading restaurant reservation platform, to enhance its value proposition for affluent consumers and strengthen its foothold in the highly competitive dining and hospitality space.
Moreover, American Express has been proactive in refreshing its suite of credit and charge card products, ensuring that its offerings remain compelling and aligned with the shifting preferences of its target market. In the third quarter of 2024, the company refreshed its popular U.S. Consumer Gold Card, adding new dining-focused benefits that have resonated with its Millennial and Gen-Z customer base, a key growth demographic. In fact, American Express has already achieved its plan of refreshing 40 products globally this year and expects to do several more by year-end.
Despite the challenges posed by the COVID-19 pandemic, which temporarily impacted travel-related spending, American Express has demonstrated its ability to adapt and navigate through turbulent times. The company's diversified revenue streams, combined with its prudent risk management practices, have enabled it to weather the storm and emerge stronger, with a renewed focus on long-term sustainable growth.
Future Outlook
Looking ahead, American Express faces a dynamic and evolving competitive landscape, with emerging financial technology (fintech) players and traditional banks vying for a larger share of the payments industry. The company has also faced various challenges over the years, including competition from Visa and Mastercard in the credit card market, regulatory changes, and merchant lawsuits related to its merchant discount rates and anti-steering policies.
American Express is currently responding to a review by the Office of the Comptroller of the Currency (OCC) and the Department of Justice (DOJ) regarding historical sales practices relating to sales to small business customers in the U.S. The DOJ, New York Department of Financial Services, and Federal Reserve investigations are ongoing, and the company is cooperating with all inquiries. Additionally, American Express is being challenged in several countries regarding the application of value-added taxes (VAT) to certain international transactions, which are in various stages of audit or legal action.
Despite these challenges, American Express's strong brand recognition, deep customer relationships, and continuous investment in innovation position it well to maintain its competitive edge and capitalize on emerging market opportunities. The company continues to see strong demand for its products, with new cards acquired at 3.3 million in Q3 2024.
Based on its strong performance, American Express has raised its full-year 2024 EPS guidance to $13.75 to $14.05, representing 23% to 25% year-over-year growth. The company continues to expect full-year 2024 revenue growth to be around 9%, consistent with its previous guidance range.
In conclusion, American Express's rich history, prudent financial management, and strategic vision for the future make it a compelling investment proposition for those seeking exposure to the resilient and innovative payments sector. The company's ability to consistently deliver strong financial results, while adapting to the changing needs of its customer base, underscores its potential for sustainable long-term growth and shareholder value creation.