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American Express: Travel Driving Growth

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In this study of American Express Company (NYSE:AXP), we emphasized nan reasons down nan important year-over-year maturation observed among Card Network companies, which are projected to acquisition double-digit maturation successful nan early arsenic compared to different fintech companies. We examined nan effect of nan resurgence successful Travel & Entertainment expenditure connected American Express' profitability, and nan company's strategy to pat into world customers arsenic a caller root of growth. Furthermore, we delved into nan different factors that are driving user spending.

Company

TTM Revenue ($ mln)

Revenue Growth YoY %

Q3 % Analyst Revenue Difference

Stock Price Change (Q4 2022)

Q4 Guidance

Types

American Express

50,831

24.0%

-0.1%

9.20%

24.0%

Card Network

Visa (V)

29,310

18.7%

3.1%

17.12%

18.0%

Card Network

Mastercard (MA)

21,640

15.5%

1.7%

22.46%

17.0%

Card Network

PayPal Holdings (PYPL)

27,057

10.8%

0.4%

-18.02%

9.0%

Payment Facilitators

Block Inc (SQ)

16,964

17.6%

1.1%

14.42%

19.0%

Payment Facilitators

Fiserv (FISV)

17,115

2.6%

0.0%

8.47%

11.0%

Merchant Acquiring

FIS (FIS)

14,483

2.7%

-0.3%

-10.22%

6.5%

Merchant Acquiring

Global Payments (GPN)

8,691

-6.5%

1.0%

-8.08%

10.5%

Merchant Acquiring

Intuit Inc (INTU)

13,319

29.5%

3.8%

0.49%

11.0%

Financial & Accounting Software

Lufax Holding (LU)

10,652

-25.5%

-7.6%

-23.62%

-7.0%

Online Lending

Average

9.0%

0.31%

1.22%

11.90%

Source: Seeking Alpha, Khaveen Investments.

In our erstwhile coverage of Lufax, we mentioned that Card Network providers had an mean gross maturation of 19.4% YoY, higher than nan apical 10 companies' mean of 9% and nan highest among each nan fintech types. For Visa and Mastercard, we attributed its gross maturation to nan maturation of cross-border transactions which make up astir 33% of Visa's revenue. For American Express, we will spot really it leverages nan Travel & Entertainment manufacture to execute a grounds profit successful 2022.

American Express Total Revenue Net of Interest Expense ($ mln)

2020

2021

2022

Average

US Consumer Services

16,347

18,922

23,914

Growth %

15.8%

26.4%

21.1%

US Commercial Services

9,234

10,911

13,569

Growth %

18.2%

24.4%

21.3%

International Card Services

6,742

7,435

9,061

Growth %

10.3%

21.9%

16.1%

Global Merchant and Network Services

4,309

5,129

6,475

Growth %

19.0%

26.2%

22.6%

Corporate & Other

(552)

(23)

(156)

Total Revenue

36,080

42,374

52,863

Growth %

-17.2%

17.4%

24.8%

21.1%

Source: Company Data, Khaveen Investments.

Travel and Entertainment Spending Drives Revenue

American Express Billed Services Spending Volumes ($ bln)

4Q2021

1Q2022

2Q2022

3Q2022

4Q2022

Average

Goods & Services

250

229

252

250

270

Growth %

-8.4%

10.0%

-0.8%

8.0%

2.2%

Travel & Entertainment

65

70

88

88

87

Growth %

7.7%

25.7%

0.0%

-1.1%

8.1%

Source: Company Data, Khaveen Investments.

From nan array above, while nan company's spending volumes from Goods & Services is astir much than 3 times than that of its Travel & Entertainment segment, nan Travel & Entertainment conception was its main maturation driver successful 2022, pinch an 8.1% mean maturation complaint compared to 2.2% for Goods & Services volumes.

American Express Network Volumes Growth YoY %

3Q2021

4Q2021

1Q2022

2Q2022

3Q2022

4Q2022

2022 Average

Goods & Services

18%

19%

19%

15%

13%

7%

14%

Travel & Entertainment

126%

130%

119%

80%

52%

34%

71%

Airline-Related

429%

271%

241%

142%

110%

62%

139%

Source: Company Data, Khaveen Investments.

Moreover, YoY comparisons show that Airline-Related expenditures connected American Express paper networks had nan highest growth, averaging 139% YoY successful 2022. This is followed by Travel & Entertainment and Goods & Services pinch an mean YoY maturation of 71% and 14% respectively successful 2022.

Consumers are incentivized to usage cards arsenic they are overmuch much convenient, supply fraud protection, and astir importantly earn rewards which usually travel successful nan shape of aerial miles aliases cashback for their adjacent level summons aliases edifice stay. Consumers thin to get amended speech rates from their cards excessively erstwhile overseas arsenic compared to withdrawing from ATMs overseas.

"Some cards tin moreover gain amended grant rates for your expenditures overseas aliases for your recreation bookings," arsenic mentioned by ValueChampion, frankincense we spot nan precocious maturation of consumers utilizing cards for travel-related expenses.

Global Consumer Expenditure

2019

2020

2021

2022

2023F

2024F

2025F

Total Retail Sales (tln)

24.45

23.74

26.03

27.34

28.64

30.03

31.27

Growth %

-2.9%

9.6%

5.0%

4.8%

4.9%

4.1%

Total Travel Revenue (bln)

720.2

296.9

430.8

637.6

755.9

855.4

924.3

Growth %

0.2%

-58.8%

45.1%

48.0%

18.6%

13.2%

8.1%

Source: Statista, InsiderIntelligence, Khaveen Investments.

We judge American Express is riding nan secular inclination of post-pandemic travel. As seen from nan array above, full world recreation gross has grown by 45.1% and 48.0% successful 2021 and 2022, respectively, and has yet to scope pre-pandemic levels. Total world unit sales, connected nan different hand, recorded a maturation complaint of only 9.6% and 5.0%, respectively successful 2021 and 2022. Travel gross is expected to turn astatine an mean of 13.3% complete nan adjacent 3 years, whereas full unit income are expected to turn astatine an mean of 4.6%.

amex recreation volumes

Company Data, Khaveen Investments

With Travel & Entertainment expenditure making up astir a 4th of full transaction volumes nether Billed Services, it is astonishing that for 2022, non-interest revenues for U.S. Consumer Services, Commercial Services and International Card Services person accrued by 27%, 24% and 22%, respectively. This is because nan U.S. reopened successful 2021, compared to galore world countries which reopened from nan mediate to extremity of 2022. Thus, we should spot nan highest maturation from world countries.

In conclusion, based connected our study of American Express' full revenues above, we tin spot that its full gross maturation was 17.4% successful 2021 and 24.8% successful 2022, which was successful nan precocious scope of management's anticipation of betwixt 23 to 25%.

International Card Services Growth Lowest Among 3 Segments

American Express Total Revenues Net of Interest Expense ($ mln)

2016

2017

2018

2019

Average

U.S.

26,339

27,187

29,864

32,629

Growth %

3.2%

9.8%

9.3%

7.4%

EMEA

3,570

3,927

4,419

4,388

Growth %

10.0%

12.5%

-0.7%

7.3%

APAC

3,275

3,464

3,656

3,934

Growth %

5.8%

5.5%

7.6%

6.3%

LACC (Americas excluding nan US)

2,360

2,505

2,584

2,776

Growth %

6.1%

3.2%

7.4%

5.6%

Others

(106)

(205)

(185)

(171)

Total

35,438

36,878

40,338

43,556

Growth %

4.1%

9.4%

8.0%

7.1%

Source: Company Data, Khaveen Investments.

Based connected institution data, its 3-year mean pre-pandemic gross maturation for nan U.S. was 7.4%, intimately followed by EMEA astatine 7.3% and APAC astatine 6.3%. This is followed by LACC pinch gross maturation of 5.6%. From our analysis, we tin spot that U.S. gross maturation was nan highest, which is contrary to what guidance stated that its "international businesses were among nan fastest-growing anterior to nan pandemic."

American Express Non-Interest Revenue ($ mln)

2020

2021

2022

U.S. Consumer Services

10,125

12,989

16,440

Growth %

28.3%

26.6%

U.S. Commercial Services

8,210

9,833

12,196

Growth %

19.8%

24.0%

International Card Services

5,877

6,761

8,262

Growth %

15.0%

22.2%

Source: Company Data, Khaveen Investments.

In summation to our pre-pandemic data, we tin spot that U.S. Consumer and Commercial Services non-interest gross maturation are astatine 26.6% and 24.0%, respectively, which is greater than International Card Services astatine 22.2%.

(Management) sees tremendous opportunities for maturation successful cardinal regions contempt ongoing macroeconomic geopolitical uncertainties (and thus) made an organizational alteration a fewer months agone to thief prehend connected these opportunities (to) execute our semipermanent maturation scheme aspirations of gross maturation successful excess of 10%. - Steve Squeri, Chairman & Chief Executive Officer.

American Express Network Volumes Growth YoY %

3Q2021

4Q2021

1Q2022

2Q2022

3Q2022

4Q2022

Average

US Consumer Services

37%

37%

38%

27%

22%

15%

29%

U.S. Commercial Services

28%

39%

31%

27%

20%

11%

26%

International Card Services

27%

28%

33%

29%

21%

14%

25%

Total Billed Business

31%

32%

34%

27%

21%

13%

26%

Source: Company Data, Khaveen Investments.

Within nan past 6 quarters, International Card Services grew 25% connected mean successful web volumes, somewhat beneath U.S. Consumer and Commercial Services maturation YoY. As a result, we judge that American Express is not only focusing connected world markets to seizure Travel & Entertainment income but for nan semipermanent maturation opportunity that is yet to beryllium seen based connected past growth.

Region

2021 Population (mln)

Card Holders (mln)

Card Penetration

U.S.

331.9

221.4

66.7%

EMEA

884.1

203.0

23.0%

APAC

4711.3

874.4

18.6%

LACC

698.3

133.7

19.1%

Source: Statista, Data Commons, Global Economy, Khaveen Investments.

From nan array above, we tin spot that nan paper penetration complaint successful nan U.S. is substantially higher than nan different reportable regions based connected American Express' 2021 yearly report. As a result, we judge that nan U.S. paper marketplace is highly saturated and internationally location are overmuch much opportunities to grow successful APAC, particularly wherever location are astir 4.7 bln people. The penetration complaint of Card Holders internationally is 22.26% which is overmuch little compared to nan U.S. frankincense boasting immense opportunities for American Express to grow internationally. RBR, a unit slope investigation consultancy, forecasted nan "value of paper payments will scope $45 tln by 2023" pinch "50% of world paper expenditure taking spot successful Asia Pacific."

Overall, we judge location is simply a immense opportunity for American Express to grow internationally which would lend positively to web measurement maturation and boost discount revenues. Discount revenues, which represented 60.7% of full gross successful 2021, are recorded arsenic the...

fee earned connected transactions occurring astatine merchants that person entered into a paper acceptance statement pinch American Express - American Express Annual Report.

Consumer Spending Driven by Take Rates, Spending Volumes, and nan Younger Generation

American Express Total Revenue Net of Interest Expense ($ mln)

2020

2021

2022

U.S. Consumer Services

16,347

18,922

23,914

U.S. Commercial Services

9,234

10,911

13,569

International Card Services

6,742

7,435

9,061

Global Merchant and Network Services

4,309

5,129

6,475

Corporate & Other

(552)

(23)

(156)

Total Revenue

36,080

42,374

52,863

Source: Company Data, Khaveen Investments.

From nan array above, we tin spot that U.S. Consumer Services contributes nan highest revenue, representing 45.2% of American Express' revenues. International Consumers represented 64% of International Card Services Volumes successful 2022. Thus we judge that user spending is apt to lend to a mostly of American Express' gross and gross growth. We analyzed nan drivers of user spending, arsenic guidance believes that...

millennial and Gen Z customers drove our highest billed business maturation wrong nan segment.

U.S. Consumer Services

2020

2021

2022

Proprietary cards-in-force (mln) (a)

37.7

39.0

41.7

Growth %

3.4%

6.9%

Revenue per paper ($) (b)

269

333

394

Growth %

24.0%

18.4%

Non-interest revenues ($ mln) (c)

10,125

12,989

16,440

Growth %

28.3%

26.6%

Average proprietary Card Member spending ($) (d)

8,958

11,390

13,261

Growth %

27.2%

16.4%

Billed business web volumes ($ bln) (e)

338

444

553

Growth %

31.5%

24.5%

Take complaint (f)

3.0%

2.9%

3.0%

Growth %

-2.5%

1.7%

*c = a × b, e = a × d, c = e × f

Source: Company Data, Khaveen Investments.

From nan array above, U.S. Consumer Services' non-interest gross had accrued from astir $13.0 bln successful 2021 to $16.4 bln successful 2022 and nan full worth of its web volumes accrued from $444 bln successful 2021 to $553 bln successful 2022. This is chiefly driven by gross per paper and mean proprietary Card Member spending which grew by 18.4% and 16.4% respectively. The return complaint connected nan different manus has remained comparatively changeless since 2020, pinch American Express earning astir 3 cents connected each dollar of user spending.

business by age

American Express

3.3 cardinal caller proprietary cards during nan 4th (with) Millennial and Gen Z comprising much than 60% of our proprietary user paper acquisitions successful nan quarter. - Steve Squeri, Chairman & Chief Executive Officer.

According to nan chart above, web volumes spent by nan Millennials and Gen-Z were increasing nan fastest astatine 30%, compared to Gen-X and Baby Boomer+ pinch 14% and 6% growth, respectively.

Although actual steps person not been mentioned by American Express' guidance to target this audience, Visa has published investigation projecting that consumers aged 50 and supra would beryllium responsible for 52% of full spending by 2025, an summation from 50% successful 2015, which mightiness propose that Visa is looking to cement its power among nan older generations. Thus, we judge American Express' strategy to target Millennials and Gen-Z is nan correct move to debar nonstop title and summation marketplace share.

Population Demographics successful 2021 (mln)

US

%

World

%

Greatest and Silent Generation (born earlier 1946)

20.0

6.0%

200

2.6%

The Baby Boomer Generation (born 1946-1964)

70.2

21.1%

1,100

14.5%

Generation X (born 1965-1980)

65.8

19.7%

1,400

18.4%

The Millennial Generation (born 1981-1996)

72.2

21.7%

1,700

22.4%

Generation Z (born 1997-2012)

68.6

20.6%

2,500

32.9%

Generation Alpha (born aft 2012)

36.5

10.9%

700

9.2%

Total

333.3

100%

7,600

100%

Source: Statista, Schroders, Khaveen Investments.

From nan array above, nan U.S. property demographic is astir moreover crossed nan biggest 4 generations, indicating an aging organization that is apt to already ain cards from different Card Network providers owed to a precocious paper penetration complaint of 66.7% arsenic mentioned successful nan erstwhile point. Thus, by targeting nan world demographic of nan Millennial Generation and Gen Z which is astir 55% of nan population, we judge American Express is better-positioned to summation marketplace share, arsenic nan world paper penetration complaint is only 22.3%.

While nan Millennials represent nan largest group of consumers and nan Baby Boomers person nan largest buying power, Gen Z's spending powerfulness is connected nan rise. According to a Bloomberg study from past year, young students and professionals bid $360 cardinal successful disposable income. - Forbes

In summation to nan rising purchasing powerfulness of nan younger generations, astir of them are located successful Asia and different emerging markets.

Importantly, 9 retired of 10 members of Gen Z unrecorded successful Asia and different emerging markets. While developed markets suffer from "peak youth," Gen Z increasingly looks for illustration nan emerging markets' concealed weapon." - Schroders.

As Gen Z slow participate nan workforce, American Express would beryllium looking to supply them pinch their first debit aliases in installments paper to summation marketplace stock alternatively of competing pinch nan Baby Boomers, which would traditionally beryllium dominated by Visa and Mastercard.

Risk: Recession Risk Could Impact Travel Expenditures

The company's precocious maturation successful caller quarters was owed to an summation successful recreation expenditure by corporates and consumers. As economists predict that a recession could beryllium coming successful 2023, recreation mightiness arsenic a consequence return a deed again. The Covid-19 pandemic resulted successful a 56.7% decrease successful worldwide rider capacity according to a published insubstantial by nan National Library of Medicine. Adventure.com highlighted that successful 2008, aerial recreation "dropped disconnected by one-fifth" and a "31.6% reduction successful recreation measurement successful September of 2001 YoY" aft nan 9/11 attacks arsenic mentioned successful a published insubstantial connected SpringerLink. If location is to beryllium a recession successful 2023, its effect connected nan recreation manufacture would apt beryllium akin to nan 2008 recession, alternatively of nan much terrible Covid Recession, and 9/11 recession.

However, we judge that moreover if aerial recreation is to decrease, its effect connected American Express' revenues would beryllium minimal aliases delayed. A caller American Travel Sentiment Study shows that "travel is now a privilege and spot their vacation arsenic a sacred, worthwhile investment" and recreation advisors are "witnessing a reluctance to springiness up picnic plans nary matter what nan system brings."

Verdict

All successful all, American Express performed nan champion retired of each nan fintech companies, pinch nan highest Q3 gross maturation YoY of 24.0% and highest Q4 guidance of 24.0%, which is trumped by its existent gross maturation of 24.8%. Despite secular trends of gross from Travel & Entertainment picking up, American Express has differentiated itself by focusing much connected Consumer Services, successful peculiar nan Millennials and Gen Z which would look to beryllium its maturation driver to execute gross maturation supra 10% successful nan agelong run. To forecast early revenues, we tapered down its 3-year humanities mean by 2% for each twelvemonth for each of its 4 segments.

American Express Valuation

2023F

EBITDA (2023F) ($ mln)

15,594

5-year AXP EV/EBITDA Ratio

12.63x

EV ($ mln)

196,915

Debt ($ mln)

81,271

Cash ($ mln)

33,052

Equity Value ($ mln)

148,696

Share Outstanding (mln)

744.19

Price Target ($)

199.81

Current Share Price ($)

177.27

Upside

12.71%

Source: Khaveen Investments.

Based connected nan American Express Company 5-year average EV/EBITDA (excluding 2020) of 12.63x, frankincense we obtained an endeavor worth for 2023 to beryllium $196.9 bln and a value target of $199.81, pinch an upside of 12.71% and rated nan institution arsenic a Buy.

This article was written by

Khaveen Investments floor plan picture

Khaveen Investments is simply a Global Macro Quantamental Hedge Fund managing a tactical asset-allocated portfolio of globally diversified investments. We person interests successful 100+ investments crossed aggregate plus classes, countries, sectors and industries. Our finance attack takes some a top-down and bottom-up attack encompassing macro-economic, fundamental, quantitative and method analysis. We service accredited investors passim nan globe, which see HNW individuals, SMEs, associations, and institutions. Our finance managers person decades of finance acquisition betwixt them, pinch investigation expertise successful emerging technologies specified arsenic Artificial Intelligence, Cloud Computing, 5G, Autonomous & ElectricVehicles, FinTech, Augmented & Virtual Reality and nan Internet of Things.www.khaveen.com

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Additional disclosure: No accusation successful this publication is intended arsenic investment, tax, accounting, aliases ineligible advice, aliases arsenic an offer/solicitation to waste aliases buy. Material provided successful this publication is for acquisition purposes only, and was prepared from sources and information believed to beryllium reliable, but we do not guarantee its accuracy aliases completeness.

Editor: Naga



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