What recession? This resilient Warren Buffett stock just keeps plugging in
Many economists and pundits predict some level of recession in 2023, which is expected to negatively impact the future earnings of many companies.
But you wouldn’t know a recession was imminent by looking at the performance of American Express (NYSE:AXP). The payments and card services giant is a longtime favorite of legendary investor Warren Buffett and has long held the large portfolio of conglomerate stocks that Buffett manages, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B).
Not only did AmEx beat third-quarter earnings estimates, but it also reaffirmed its outlook for the full year, 2023 and 2024, to be robust, which is one of the many reasons this stock continues to perform.
American Express saw strong activity leading to strong guidance
AmEx saw total volume on its end-to-end payment network slightly lower than the prior quarter, but still well above levels seen in 2021. Spending on AmEx Travel and Entertainment (T&E) cards continues to exceed management’s expectations this year and were up 57% year over year in the third quarter.
CEO Stephen Squeri said about the company earnings call earlier this month that he sees higher travel bookings than “we haven’t seen in a long, long time. I mean it’s going before the pandemic.”
Squeri also said the holiday season is shaping up to be extremely strong as people book three months in advance. This is a big reason why Squeri sees no change in consumer spending habits and also a big reason why the company has reaffirmed its longer term guidance.
AmEx still expects full-year revenue to grow as much as 25% from 2021 and earnings per share to top management’s initial guidance of $9.25 to $9.65. In 2023, management still expects “revenue growth levels above long-term aspirations.” In 2024 and beyond, management is still targeting revenue growth of 10% or more and earnings growth in the mid-teens range.
The brand proves to be exceptionally strong
One of the reasons Buffett has always liked American Express is because he thinks the brand is special, a characteristic he looks for in many of his investments. You may not always see it, but a powerful brand can be extremely valuable to a business.
In the third quarter, AmEx added 3.3 million new cards, the highest level since the start of the pandemic and in particular in its paid products, where members pay an annual fee. New cards taken up by Millennials and Gen Z customers accounted for 60% of new card growth in the quarter, showing how strongly the brand is resonating with younger customers who may be s turn out to have a higher lifetime value.
The brand not only attracts younger customers, but also very high quality customers from a credit point of view. Loan losses have been almost flat for the past three quarters, while delinquencies have increased quite modestly. Additionally, the company’s total provision for loan losses is still significantly lower than it was on the first day of 2020, when all major banks had to implement a new accounting policy on how they reserve for loans.
AmEx Chief Financial Officer Jeff Campbell noted that he does not expect reserves to recover to the level seen on the first day of 2020 because the company’s loan book is now stronger. Additionally, he noted that AmEx’s loan portfolio is one of the highest quality loan books in the industry, if not the highest end, and therefore does not have reserves as high as its peers. .
Things could change but AmEx is ready
Obviously, things could certainly change in 2023 and there could indeed be a severe recession. But as management noted, some would say the economy is currently in a mild recession and AmEx just grew revenue by 27% year-over-year. Additionally, management noted that what happens in the stock market is not always correlated with spending trends in the economy.
on a large scale from AmEx Payments network, a premium loan book with a high-quality customer base, and a strong brand are just a few of the reasons this longtime Buffett stock can continue to perform despite what appears to be an uncertain economic outlook.
Make no mistake: in the event of a recession, the company is resilient and will be able to adapt, but at the moment management simply does not see any signs that would cause it to change course.
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