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American Express Hits Record High Before Consumer Credit Scores Change

On Jan. 24 before the market opened, American Express (NYSE:AXP) reported fourth-quarter and full-year results for 2019.

Analysts were expecting $11.36 billion in revenue and $2 in earnings per share for the quarter, but the lender beat expectations with revenue of $11.37 billion and earnings per share of $2.03. Year over year, revenue was up from $10.47 billion while earnings per share were down from $2.32. Net income for the fourth quarter came in at $1.7 billion compared with $2.0 billion in the prior-year quarter.

For the full year, revenue was $43.55 billion, net income was $6.75 billion and diluted earnings per share were $7.99, compared to $40.33 billion, $6.9 billion and $7.91 in full fiscal 2018.

Over the past three years, American Express' revenue has grown 10.8% per year, while its EPS without non-recurring items has grown $16.1% per year. Over the same timeframe, shares have risen approximately 23.21% per year.


Factors driving growth

"During 2019, we added 11.5 million new proprietary cards and continued to deliver solid billings growth. Almost 70 percent of our new Card Members are choosing our fee-based products, helping to drive card fee revenue growth of 17 percent," Chairman and CEO Stephen J. Squeri said.

The fee-based cards return more money in rewards to cardholders than the no-fee cards, making them better options for high spenders. Growth in the fee-based cards is a reflection of high consumer confidence and spending and means that individual cardholders are charging increasing amounts of money to their cards.

This is not surprising, considering the state of the economic environment. Strong bull markets have historically seen loans being tempered by high interest rates, but the current bull market actually has a base rate of 1.25% to 1.50%, putting it at record lows for an economy that is already flying high.

Another strong contributor to growth was international expansion. For fourth-quarter 2019, net income from global consumer services increased 21% to $702 million compared to the prior-year quarter, while global merchant and network services were up 10% to $549 million.

FICO calculation change: headwind or tailwind?

FICO recently announced that it will be launching a new individual credit score model, FICO 10, in the summer. Unlike the previous model, which placed comparatively more emphasis on recent credit activity, FICO 10 will give more weight to a consumer's account balances and missed payments over the past 24 months.

Fair Isaac Co. estimates that 110 million Americans will see their credit scores change, mostly by only a few points. An estimated 40 million will see their credit scores drop more significantly at an average of 20 points. The new rating will also flag those who apply for personal loans since these are considered riskier than other types of loans. Personal loans have been the fastest-growing type of consumer debt in recent years, going up 11.9% in 2018 and another 11% in 2019.

What effect will this have on lenders? Real effect will probably be mixed. Lower credit scores will make it more difficult for some individuals to be approved for cards, since the change is expected to see more decreases than increases in credit scores. This likely means that credit card providers will not be able to add as many new members. However, it may also help decrease the number of people who default on their loans, as those with lower credit scores cannot borrow as much money.

All in all, the changes will likely lessen the amount of money borrowed and the amount of loans that go into default, which may be a crucial check against record-setting bullish market conditions.

Looking forward

In 2020, American Express has issued guidance for 8% to 10% growth in revenue and earnings per share of $8.85 to $9.25. "Our consistent performance, along with our continued investments in product innovation and growth opportunities, gives us confidence that we have a long runway for steady growth over the long term," Squeri said.

Some analysts are getting nervous over the company's high valuation. Prices soared to a record high of $137.54 following the fourth-quarter earnings release, making several technical indicators, including the 50-day relative strength index, turn against further share price appreciation. The company is also facing increasing competition at home and worldwide as a broader range of online financial services becomes available.

That being said, most of American Express' revenue comes from the U.S., which relies on major credit card companies for everything from loans to buying a house. Like the big U.S. banks, this company's share price will likely continue to move in the same direction as consumer spending.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful analysis or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.