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Recession fears may be ‘overblown’ as consumer credit card debt grows: Analyst

Bob Napoli, William Blair Co-Group Head of Financial Services and Technology, joins Yahoo Finance Live with his insights on what credit card companies' earnings may tell us about a possible recession.

Video Transcript

SEANA SMITH: December survey revealing that Americans are carrying more credit card debt. 35% of US adults carry credit card debt from month-to-month. That's up from 29% in 2021. Now, consumer spending has remained strong despite fears of a recession. That is clearly evident in the Q4 earnings report that we just got from American Express.

Amex cardholders are spending 24% more at restaurants than they were a year ago. Spend on lodging and airlines both seeing double-digit growth. Shares of Amex moving to the upside today-- big pop that we saw in shares, up nearly 11%. Joining us now is Bob Napoli, he's the William Blair Co-Group Head of Financial Services and Technology.

Bob, it's great to see you here. So you have an outperform rating on American Express. We've gotten Visa and Mastercard also this week. You have an outperform rating on those as well. We've all been very concerned about a slowdown, about consumers pulling back. Are those fears clearly overblown because of these results?

BOB NAPOLI: Well, again, the concerns are overblown because the consumer is under leveraged and they have jobs. And generally, when you have low consumer debt as a percentage of their income and they're employed, they're going to keep spending. So I think the fears of a bad recession are overblown.

JARED BLIKRE: And just thinking about some of their key initiatives, especially with respect to their premium offerings, how does that affect the changes that have really happened to some of their user-- just to society overall, and travel habits, spending habits, saving habits that have changed over the last few years? How are their premium initiatives attacking that?

BOB NAPOLI: Well, their premium initiatives-- they've added-- I guess they're targeting a higher percentage of younger-- 60% of new card members this year. They added a record amount of new card members, up more than 10% this year. 60% of those are millennials and Gen Zs.

And millennials and Gen Zs are really good at knowing how to use those rewards. And Amex has targeted things like Netflix, and gyms, and travel rewards to those younger consumers. Now, the rebound in travel certainly has been good for American Express as well.

But they've developed those cards. I mean, those consumers are-- they're paying fees. I mean, American Express card isn't cheap. They pay a good annual fee. But they give you the rewards and high quality service that makes people willing to pay those fees.

SEANA SMITH: Bob, when you take a look at these numbers from Amex, clearly, cardholders spending more on experiences-- spending was up 24%-- or they increased spending by 24% at restaurants than they did a year ago, clearly spending more on travel like you're saying. Do you see that spending pattern, those trends changing at all over the next couple of months as consumers maybe do brace for some sort of a slowdown?

BOB NAPOLI: Well, you're going to see you're going to have tougher comps. So you're going to get more gradual increases in spending. I mean, the growing almost 30% revenue, that's not a sustainable level. I think double-digit revenue growth for Visa, Mastercard, for the payment space is sustainable.

But you are going to see, as we lap those easier-- those tougher comps because of the rebound in COVID, you are seeing in the first quarter-- actually, you've seen really strong spending coming out of the gate in the month of January. Some of that is due to a year ago, we had Omicron.

But spending continues to be strong. If we do get a bad recession, yeah, you'll see a pullback in consumer spending. I think where Amex is at the high end, you'll probably see less. But also, you still have more to go in international. I mean, China just reopened. Japan reopened in October.

You saw a 50% increase in spending-- travel spending in Japan. China is the biggest travel market in the world. And you're going to see-- I mean that's going to be gradual over the course of this year where you'll see the rebound in China, which will carry over into Asia, which hasn't rebounded yet.

So there's still more to go on the travel side. The consumer is employed. I mean, the Fed, I think a couple more rate increases and they're most likely done. So I think we're in a good place. The potential for a soft landing, I think, has increased.

JARED BLIKRE: And I want to ask you-- a lot of companies talking about the strong dollar now. American Express has unique exposure to foreign currency. And I believe, at least historically, that has really benefited them whenever they have to change some of these money from dollars into euros, vice versa. How is that dynamic playing out with the currency-- with the volatility that we've seen in the dollar over the last year?

BOB NAPOLI: Well, the volatility in currency-- actually, I think Visa and Mastercard probably benefit a little bit more of that. They have a higher percentage of international than Amex does. I mean the cross-border travel for Visa and Mastercard is a very, very profitable revenue stream.

But the strength in the dollar is actually mixed, I would say, for those companies. But it certainly helps their earnings as you translate the foreign earnings into US dollars, they're worth more as the dollar weakens. But I do see some slowdown in some of the benefits on foreign exchange volatility for Visa, Mastercard. I see all three benefiting from the weaker dollar.

SEANA SMITH: So, Bob, you have an outperform rating on all three. Clearly, you are bullish about what we could see over the next 12 months. If you had to pick one of those names, which one is positioned best?

BOB NAPOLI: Well, the one that is the best stock to own and our top pick for this year is American Express. And the reason for that is that it's trading at a 50% discount to Visa, Mastercard. Visa, Mastercard are some of the best franchises in the world with the biggest-- with very large moats. But Amex is right there with them.

And should it trade at a discount? Yes. A 50% discount is ridiculous. A discount to the S&P 500 when Amex fundamentally has outperformed the S&P 500 over any period of time that you want to look at-- 5, 10, 15, 20 years-- you know, Amex is just not getting the respect it should. Sure, it's getting a little more today, but it's still only at 13 times next year's earnings. This stock should trade at 17 times an S&P multiple, at least-- probably a premium to the S&P.

JARED BLIKRE: No respect-- a Rodney Dangerfield joke.

BOB NAPOLI: Exactly.

JARED BLIKRE: From back in the day, that's what came to mind there. Thank you. Great insights as always. Bob Napoli.