Intriguing Value in Payments Space

Shares of credit card firm American Express (AXP) were dragged down alongside the broader payments plays in recent weeks. The market sell-off has dealt more damage to the high-multiple growth stocks, mostly sparing the cheaper, value names with robust fundamentals.

As a credit card company with more of a value multiple, American Express stock has done a better job of holding its own than its peers. Shares of AXP stock are about even year-to-date, while Visa (V) and Mastercard (MA) are down close to 10% for 2022 thus far.

American Express is more of a value-flavored payments stock with considerable travel exposure. The stock could really outpace its peers once the recovery in the travel industry kicks it up a notch.

While evidence of a travel rebound has already worked its way into American Express’ quarterly numbers, there’s still a lot more room to the upside, as the world economy looks to move on from the pandemic. I’m bullish.

Are Risks in 2022 Overblown?

The ongoing crisis in Ukraine could hurt the broader travel industry over the medium term. Further, the emergence of another COVID-19 variant of concern could also take away from the travel industry’s remarkable bounce-back from those ominous 2020 lows. 

A “one step forward, two steps backward” type of scenario could pan out and weigh heavily on firms with more than their fair share of international travel exposure.

With shares of American Express trading at just under 17 times trailing earnings, I do think that much of a diminished travel recovery outlook is baked in here. Despite the uncertain outlook, management showed its confidence with the authorization of a very generous 20% dividend hike, with a strong guide for top-line growth in the 18%-20% range.

Although solid spending trends could cool off over the coming quarters over rising geopolitical risks, the long-term recovery trajectory remains intact. I view AXP as one of the more prudent ways to bet on a continued recovery in travel and consumer spending.

Of course, the risk of recession seems to be rising by the day as the crisis in Ukraine unfolds.

The crisis could make inflation much worse, which could pressure the Fed to raise rates at a quicker pace, even as economic growth and corporate earnings take a breather. Just how much of a breather remains to be seen. Regardless, an inverted yield curve seems within reach and with that could accompany another economic recession.

With greater exposure to more affluent, higher-credit consumers, though, American Express can better weather an economic contraction.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, AXP stock comes in as a Moderate Buy. Out of 19 analyst ratings, there are 15 Buy recommendations and 3 Hold recommendations.

The average American Express price target is $195.68, implying an upside of 11.4%. Analyst price targets range from a low of $155 per share to a high of $240 per share.

Bottom Line on American Express Stock

American Express seems like a more conservative payments play than its pricier credit card peers at this juncture.

The valuation implies a greater margin of safety. Although the lower multiple suggests a lack of innovation, it is worth noting that American Express, like Mastercard, has been investing heavily in innovative initiatives to hold its own against up-and-coming fintech disruptors.

Sure, American Express seems like a boring, non-innovative firm that’s ripe to be disrupted, but it’s not. The company is fully aware of the disruptive potential of blockchain and cryptocurrencies. That’s a major reason why American Express Ventures has its sights set on Web 3.0. Not an area you’d expect such an old-school firm like American Express to be in.

Although there are prominent risks ahead, American Express seems more than worthy of a higher multiple. Management seems incredibly confident, and I think giving them the benefit of the doubt could literally pay dividends.

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