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Robert Stephens, CFA
Robert Stephens, CFA
Articles (217) 

Why American Express Has Upside

An innovative strategy could boost its financial performance

July 03, 2019 | About:

American Express Co.'s (NYSE:AXP) new partnerships could provide it with an improved competitive position that leads to growth in a wider range of markets.

The company is also engaging in merger and acquisition activity to enhance its digital services, as well as differentiate its offering versus rivals.

While its stock has risen 26% over the last year and the outlook for the world economy is uncertain, an increasingly innovative strategy could mean it has long-term investment appeal.

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Growth strategy

The company has signed a number of new partnerships in the most recent quarter that have the potential to catalyze its financial performance. For example, it revamped its commercial and consumer cards with Marriott’s Bonvoy travel program. This is a new rewards program that provides more opportunities to earn rewards points, as well as greater investments in a digital offering that is likely to resonate with customers. It could lead to greater interest among consumers, as well as higher spending by cardholders.

American Express has made further progress in a number of international partnerships that provide it with increasing levels of diversity. In China, for example, the company made progress in developing its network offerings with partner LianLian in the most recent quarter. It also announced a new accounts payable automation solution for small and medium-sized businesses with Bill.com.

In addition, the company acquired digital platforms Pocket Concierge and LoungeBuddy in the first quarter. These platforms provide customers with the ability to make reservations for restaurants in Japan and access to airport lounges worldwide. The acquisitions are expected to enhance the customer experience.

Delta partnership

American Express’ renewed partnership with Delta (DAL), which was announced last quarter, could enhance its long-term growth outlook. An 11-year partnership means the two companies can become increasingly integrated in order to deliver an enhanced customer experience.

Delta’s large base of business flyers provides American Express with a strong platform to attract new customers. The airline’s international exposure also means there is scope to reach new customers in fast-growing markets.

Since Delta contributes 20% of American Express’ lending and 8% of its billings, it is a key partner for the business. The stability a long agreement provides could mean investor sentiment improves over the medium term, as investors price in the prospect of continued account acquisitions.

Threats

The company’s performance in the first quarter was not as strong as last year. Constant currency revenue increased 8% versus 10% in the corresponding 2018 period. A further slowdown in revenue growth could be ahead due to the risks faced by the world economy. The U.S. is poised to introduce new tariffs on $4 billion worth of imports from the European Union following the $21 billion worth of tariffs implemented in April. This could lead to reciprocal tariffs that may cause consumer spending to come under pressure.

American Express is seeking to offer an increasingly innovative product to compete more effectively against rivals in what could become a more challenging operating environment. For example, in the most recent quarter, it reported increases in customer engagement and acquisitions from its Member-Get-Member Referral Program. Its lending offerings such as Pay It Plan It are also resonating with customers.

Outlook

In the next fiscal year, American Express is forecasted to record a 10.7% increase in earnings per share. Since the stock trades with a forward price-earnings ratio of 15.5, it appears to offer good value for money.

The renewed partnership with Delta, as well as new partnerships, could provide access to new customers in a number of markets around the globe.

The company’s acquisitions and an increasingly innovative range of offers may lead to greater differentiation versus peers that provides an enhanced customer experience.

Even though the stock has outperformed the S&P 500 by 18% in the last year, further capital growth could be ahead.

Disclosure: the author has no position in any stocks mentioned.

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