Lower interest rates fuel prospects for American Express in stock upgrade, along with three lease-to-own companies

By Steve Gelsi

Stephens analyst lifts credit-card giant to equal weight and upgrades Aaron's Co., Prog Holdings and Upbound Group

American Express Co. drew an upgrade to equal weight from underweight at Stephens on Tuesday as analysts weighed the potential impact of an expected drop in interest rates in 2024.

After issuing a profit warning in a December webcast, American Express Co. (AXP) appears poised to return to its historical revenue and earnings-per-share growth in 2025, said analyst Vincent Caintic.

In addition, falling interest rates "have a slight benefit" to American Express due to better funding costs for charge-card receivables without yield impacts.

Moreover, most of the revenue generated by American Express is fee-based and therefore not reduced by falling rates, he said.

"We remain worried about Amex's relative credit performance, but we think interest rates will likely benefit superprime customers more," Caintic said.

American Express's stock dipped 0.2% Tuesday.

Stephens also upgraded lease-to own companies Aaron's Co. (AAN), Prog Holdings Inc. (PRG) and Upbound Group Inc. (UPBD) to overweight from equal weight on their improved prospects in a lower-interest-rate environment.

The analyst consensus estimates for Aaron's Co.'s profit appear to be overly conservative, Stephens said. The company will get a boost from lower-than-expected operating expenses, and even if that calculation is wrong, the stock price appears to be "incredibly cheap" for the company's cash-flow generation, Caintic said.

Aaron's Co.'s stock rose by 4.7% on Tuesday.

As for Prog Holdings, the company stands out as the "safest, most conservatively underwritten of the group, with credit write-offs staying firmly within their guidance range," Caintic said.

Prog Holdings' stock rose by 0.7%.

Meanwhile, Upbound Group ranks as the first of the lease-to-own companies that Stephens expects to report positive revenue in its upcoming fourth-quarter results as a "growth play" in the group, he said.

"In addition to taking market share as higher-credit lenders tighten underwriting, Upbound has had greater success winning merchant partners with its regional retailer focus," Caintic said.

Upbound Group's stock price rose by 1.1% on Tuesday.

Stephens also downgraded America's Car-Mart Inc. (CRMT) to equal weight from overweight in the face of macroeconomic headwinds due to high car prices and tighter underwriting requirements that will likely result in lower approval rates.

America's Car-Mart's stock fell by 7% on Tuesday.

Stephens also cut its Navient Corp. (NAVI) rating to underweight from equal weight based on its conclusion that analyst estimates remain about 20% higher than where they should be.

"Fundamentally we think the business is fine, though the combination of lower interest rates and the expiration of floor income contracts will significantly dampen 2024 earnings," Caintic said.

Navient's stock fell 2.7% on Tuesday.

Also read: American Express, Mastercard, Visa draw neutral rating as Monness Crespi Hardt initiates coverage

-Steve Gelsi

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01-02-24 1130ET

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