American Express draws upgrade as 'haven from deteriorating household balance sheets'

By Steve Gelsi

JPMorgan hikes rating for AXP to overweight and downgrades Capital One, SLM and Rocket Cos.

With the economy poised to potentially tap the brakes for U.S. consumers, JPMorgan Chase analyst Richard B. Shane upgraded American Express Co. to overweight from neutral on Friday.

American Express Co.'s AXP more affluent customer base may offer investors a "haven from deteriorating household balance sheets" as lower- and middle-income borrowers face pressure from depleted savings from the pandemic and the lingering effects of high inflation, Shane said.

The company's stock rose by 0.7% in premarket trading on Thursday.

American Express stands out as JPMorgan's top pick for 2024 among credit-card issuers.

"We believe AXP demonstrated the power of its business model in 2022/2023, with credit performance remaining strong despite widespread white collar layoffs," Shane said.

He included some uncertainties as he studies the mixed economic landscape of 2024.

"We believe the key issues for AXP in the near future will be the persistency of higher-income consumer spending and the trajectory of credit" Shane said.

Another potential risk is the impact of a proposed increase in capital requirements as part of the Basel III endgame currently under study by federal banking regulators, he said.

The outcome of this new regime may impact American Express's plans for dividends and stock buybacks for shareholders.

Also read: Morgan Stanley's James Gorman predicts proposed capital requirements may be tempered

JPMorgan Chase's upgrade of American Express marks at least the second ratings move this week on the company, after Stephens on Tuesday upgraded the stock to equal-weight from underweight as analysts weighed the potential impact of an expected drop in interest rates in 2024.

Also on Thursday, JPMorgan downgraded Capital One Financial Corp. (COF) to neutral from overweight and removed it from its analyst focus list.

Capital One has greater exposure to non-prime borrowers, and better risk/reward could be found elsewhere, Shane said.

JPMorgan cut SLM Corp. (SLM) to neutral from overweight because its financial outlook has been "fully incorporated" into earnings estimates and stock valuation, Shane said.

JPMorgan also downgraded Rocket Cos (RKT) to underweight from neutral due to current valuation multiples that reflect a best-case scenario for the company's business, Shane said.

"While we continue to view RKT as a long-term winner in the mortgage sector, we believe the stock is fully valued (on an absolute and relative basis)," Shane said.

Also read: Apollo and Capital One tip the scales as biggest components of KBW's 'best ideas' list

-Steve Gelsi

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01-04-24 0808ET

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