American Express (AXP) shares have seen a muted performance this year, lagging behind key market indicators and major rivals like Visa and Mastercard. While the Dow Jones Industrial Average and S&P 500 have both recorded significant gains, AXP's stock has faced a downturn. This disparity raises questions among investors and analysts, especially given that a relatively small percentage of Wall Street experts currently recommend buying American Express, a stark contrast to its industry counterparts.
The financial services firm recently unveiled its second-quarter earnings, which revealed a nuanced picture. Despite concerns regarding the broader economic landscape, consumer spending patterns, interest rates, and credit quality, American Express delivered a solid performance. Revenue climbed by 10% year-over-year, reaching $19.6 billion, though it narrowly missed analyst projections. Earnings per share saw an 11% increase, surpassing estimates, and the company's credit quality remained robust, with declining credit loss provisions and stable net write-offs.
Building on this positive momentum, American Express revised its full-year revenue growth forecast upwards to 10%. However, the company maintained its earnings guidance, projecting approximately 14% growth for fiscal year 2025 at the midpoint. A point of contention for some investors has been the notable increase in expenditures, which rose by 12% to $14.5 billion in the second quarter, outstripping revenue growth. This surge in spending is largely attributed to strategic investments in customer engagement and acquisition efforts.
During the earnings call, CEO Stephen Squeri emphasized that these heightened investments in marketing, technology, and customer acquisition are crucial for sustaining high customer retention rates and fostering long-term growth. He underscored the opportune timing for such investments, capitalizing on the robust revenue growth experienced in the first half of the year. Squeri articulated a vision of continued expansion, leveraging the company's ability to attract new generations of premium customers and pursue significant growth avenues globally. This strategic approach, he believes, positions American Express for sustained growth and attractive shareholder returns over the long haul.
While the anticipated increase in spending is expected to temper short-term growth, the projected 14% earnings growth rate still surpasses that of 2025. Furthermore, analyst consensus points to a similar growth trajectory of around 14% by 2027, with an estimated earnings per share of $20.12. As a company with a long-standing reputation for strong management, evidenced by its significant presence in Berkshire Hathaway's portfolio, American Express appears to be an undervalued opportunity at its current trading multiple of 20 times earnings, especially considering its commitment to strategic long-term growth initiatives.
