American Express (AXP) | Maintain Neutral Rating, $170PT

We view AXP as one of the most fundamentally compelling business models within our coverage. However, we believe current estimates and valuation fully incorporate a relatively positive base case. Consequently, we see more attractive risk/reward opportunities within our coverage. We believe the key issues for AXP in 2023 will be the persistency of higher-income consumer spending and the trajectory of credit.

Our view is that labor markets will “soften from the top” and the deflation of financial assets will disproportionately impact high-income consumers while low/ middle-income consumers benefit from lower inflation. The Leisure & Hospitality as well as Retail Trade sectors continue to add jobs and job openings despite higher rates, while the Information (Tech) sector has experienced the sharpest declines. AXP’s 2023 guidance is based on the assumption of slowing macro growth rather than a more significant recession and could face downside risk in the event of a hard landing.

AXP’s loan growth was at historically elevated levels in 2022. Management has noted that ~70% of loan growth in 2022 came from “existing customers” (accounts older than 1 year) suggesting that existing customers are lower risk than new customers (a view we share). However, with very strong account growth in 2022, it also appears that loan growth is disproportionately driven by newer, less seasoned accounts. At the margin, we believe this creates greater uncertainty in AXP’s loan book.

   Our Dec 2023 price target of $170 is based on applying a target multiple of 14.25x to our 2024 adj. EPS estimate of $11.94. Our target multiple is modestly below AXP’s historical post-crisis multiple of 14.5x, which reflects a relatively positive base case scenario with AXP earnings with spending and growth trends normalizing post-pandemic.