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American Express (AXP) Down 4% in 2020, What Awaits 2021?
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American Express Co. (AXP - Free Report) took a beating this year as its business suffered COVID-led economic adversities. As restrictions were put in place to contain the spread of the virus, the company’s operations related to the usage of its branded cards, net card fees, interest on loans and others came under pressure.
As travel was halted, the company experienced a decline in card holders’ spending on travel and entertainment, which is one of its high-return generating businesses. Notably, the company’s largest revenues line that is the discount revenue, declined 24% in the first nine months of this year due to a decrease in the average discount rate.
A shift in consumers’ spending mix to non-travel and entertainment category caused a decline in the average discount rate. The company is also witnessing weakness in other fees and commissions and other revenues, primarily due to softness in travel-related revenues.
Also, net card fee growth decelerated as the company slowed down on new card acquisitions over the last two quarters. Net interest income too fell 15% year over year, primarily induced by lower average loans and lower benchmark interest rates, partially offset by higher net yield.
Moreover, as a result of the spend-centric nature of the company’s business model, card member loans and receivables declined 17% and 28% year over year, respectively, due to lower billed business volumes. Even though the vaccine is available now, people’s confidence will be restored fully once the vaccine is widely available and all feel safe to travel.
A pick-up in international travel will surely support the company’s top line as overseas businesses carry higher margins than domestic activities.
Also, the company is adding benefits to its cards to lure and retain card members. Last month, it partnered with Uber, pursuant to which its card members will have access to a complimentary Eats Pass membership with Uber Eats. Sensing this need of the hour, the company recently added rewards to its cards that centered around e-commerce and delivery.
Another positive is the growing trend of digital purchases. There could be growth in online purchase volumes since e-commerce sales growth is projected to accelerate at a faster rate than the previous years. This may help expanding volumes as consumers prefer to pay through cards for their online shopping.
Further, the company is focusing on its cost-cutting strategy and aims to save nearly $1 billion in 2020. Meanwhile, it decided to spend heavily on dispensing more benefits on cards to win customers
Thus, the company’s performance and its share price course will be heavily dependent on the pace of economic recovery. Other companies in the same space including Mastercard Inc. (MA - Free Report) , Visa Inc. (V - Free Report) and Discover Financial Services (DFS - Free Report) were also subjected to coronavirus-triggered business uncertainties.
Year to date, shares of American Express have dipped 4.1% compared with the industry ’s decline of 21.4%.
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American Express (AXP) Down 4% in 2020, What Awaits 2021?
American Express Co. (AXP - Free Report) took a beating this year as its business suffered COVID-led economic adversities. As restrictions were put in place to contain the spread of the virus, the company’s operations related to the usage of its branded cards, net card fees, interest on loans and others came under pressure.
As travel was halted, the company experienced a decline in card holders’ spending on travel and entertainment, which is one of its high-return generating businesses. Notably, the company’s largest revenues line that is the discount revenue, declined 24% in the first nine months of this year due to a decrease in the average discount rate.
A shift in consumers’ spending mix to non-travel and entertainment category caused a decline in the average discount rate. The company is also witnessing weakness in other fees and commissions and other revenues, primarily due to softness in travel-related revenues.
Also, net card fee growth decelerated as the company slowed down on new card acquisitions over the last two quarters. Net interest income too fell 15% year over year, primarily induced by lower average loans and lower benchmark interest rates, partially offset by higher net yield.
Moreover, as a result of the spend-centric nature of the company’s business model, card member loans and receivables declined 17% and 28% year over year, respectively, due to lower billed business volumes.
Even though the vaccine is available now, people’s confidence will be restored fully once the vaccine is widely available and all feel safe to travel.
A pick-up in international travel will surely support the company’s top line as overseas businesses carry higher margins than domestic activities.
Also, the company is adding benefits to its cards to lure and retain card members. Last month, it partnered with Uber, pursuant to which its card members will have access to a complimentary Eats Pass membership with Uber Eats. Sensing this need of the hour, the company recently added rewards to its cards that centered around e-commerce and delivery.
Another positive is the growing trend of digital purchases. There could be growth in online purchase volumes since e-commerce sales growth is projected to accelerate at a faster rate than the previous years. This may help expanding volumes as consumers prefer to pay through cards for their online shopping.
Further, the company is focusing on its cost-cutting strategy and aims to save nearly $1 billion in 2020. Meanwhile, it decided to spend heavily on dispensing more benefits on cards to win customers
Thus, the company’s performance and its share price course will be heavily dependent on the pace of economic recovery. Other companies in the same space including Mastercard Inc. (MA - Free Report) , Visa Inc. (V - Free Report) and Discover Financial Services (DFS - Free Report) were also subjected to coronavirus-triggered business uncertainties.
Year to date, shares of American Express have dipped 4.1% compared with the industry ’s decline of 21.4%.
American Express carries a Zacks Rank #3 (Hold), presently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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