We're Cutting Our Price Target on This Holding After First-Quarter Results
While the company is taking a more conservative view, we still love its business model.
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American Express AXP delivered a nice upside surprise for its March quarter and stuck with its 2025 guidance calling for 8%-10% revenue growth and EPS between $15-$15.50. For the quarter, Amex’s EPS came in at $3.64, well ahead of the $3.47 consensus, on revenue of $16.97 billion, up 7.4% compared to year-ago levels and a hair better than the $16.94 billion market forecast.
In response, the shares are off modestly, which is likely more due to Amex not lifting its outlook for the year given the March-quarter EPS beat.
Given the uncertainty about consumer spending and the economy, we don’t blame the company for taking what could wind up being a conservative posture. However, management clearly signaled there is room to pare back its marketing budget should that become necessary. At the same time, CEO Stephen Squeri shared that for the first 10-12 days of the current quarter, spending is as strong as it was in the March quarter. That comment suggests concerns over consumer spending in certain categories being pulled forward in March may be a bit premature.
Scanning the company’s key metrics for the March quarter, the number of cards in force rose to 147.5 million and the average fee per card did the same, hitting $111 in the quarter vs. $98 in Q1 2024. This tells us the mix of cards continues to shift to premium offerings as it continues to enhance membership benefits.
Breaking down the company’s pretax income, we find that 70% can be attributed to net card fees, which climbed 18% year over year in the March quarter. That overshadowed the 5% gain in network volumes and a nice increase in average member spending.
Total card member spending grew 6% in the quarter or 7% excluding the impact of the leap year, with spending on goods and services continuing to grow at a faster rate than in 2024. Management copped to somewhat slower airline billings, which supports recent comments from airlines like United Airlines UAL. Delinquency and write-off rates were below pre-pandemic levels and flat to the prior year.
We continue to like the company’s differentiated business model compared to that of Mastercard MA or Visa V, and the stability it brings to Amex’s earnings profile. That business model also allowed the company to boost its quarterly dividend by 17% in late March to $0.82 per share, which will be paid on May 9.
On the topic of card refreshes, management commented it continues to plan multiple product refreshes this year, but on the topic of increasing card fees we suspect that much like Costco COST, Amex is only going to do so when the time is right. For Amex that means being able to bring even more value to the membership base, and, in our view, that helps keep retention rates high. Another reason why we like membership business models.
Cutting Our Price Target
In terms of our AXP price target, based on the prospects for slower S&P 500 EPS growth and the impact that is likely to have on P/E multiples accorded to the market, we are cutting it to $310 from $345. Helping support that revised price target is the new annual dividend of $3.82 per share and the average peak dividend yield of 1.1% over the last several years.
While this could prove to be a bigger reduction than needed, we would rather use company-specific as well as market-related catalysts to lift it higher down the road. Even after that reduction, the upside of more than 20%.
AXP shares remain on our shopping list. However, with March-quarter earnings heating up next week and the week after, based on what we saw this morning with UnitedHealth UNH and D.R. Horton DHI, we’ll want to hold near-term to let the market adjust its thinking to more realistic EPS growth prospects for the S&P 500.
At the time of publication, TheStreet Pro Portoflio was long AXP and COST.
