We like that wide-moat American Express (AXP) is turning its attention back toward revenue growth after the loss of a major client in 2016 and a period of emphasis on cost-cutting. A renewed emphasis on corporate spending, especially with small- and medium-size businesses, appears to be paying off. Additionally, a strengthening global economy is providing a tailwind for spending growth. However, evidence of an intense competitive environment continues to show up in results, and the company’s plans to further differentiate its rewards offerings lack specifics. We are maintaining our $88 per share fair value estimate.
The competitive environment in the consumer space remains intense. Excluding the effects of last year’s Costco business loss, total revenue expanded 8%, but rewards spending grew by 19% on the same basis. Card member services spending expanded by 24%. We think this indicates American Express is having to pass on a larger share of discount revenue to customers in order to maintain market share. Furthermore, though discount revenue as a percentage of billed business was stable during the quarter, American Express is passing on some economic benefits to merchants and acquirers through its OptBlue program. We see few signs that pressure from merchants and cardholders will let up any time soon.
American Express remains a payment method of choice for both large and small businesses, and the company’s efforts to grow in this area are likely to pay off. Although large companies are continuing to cut back on travel and entertainment expenses, American Express’ global commercial business generated mid-single-digit billed business growth, driven primarily by small business volume. Business-to-business spending represents a multitrillion dollar opportunity, and we believe American Express benefits from high switching costs and a powerful brand asset in this arena.
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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.