Why is the stock down?

The payment processing company had a record revenue year and raised its earnings forecast for the full fiscal.

American Express had a great second quarter by most measures. However, its stock price fell more than 4% to below $240 on Friday.

The second quarter revenue reached a record high of 16.3 billion dollars, an increase of 9% over the same quarter last year. Net income, however, jumped 39%, to $3.0 billion or $4.15 a share.

The third largest payment processor has also raised its outlook for earnings per share over the full year. Why was American Express’ stock down by more than 4% in one day?

Analysts had expected higher revenue from American Express of about $16.6 billion. It was therefore viewed as revenue missed. Should investors be worried or should they view this as an opportunity to buy?

Record revenues not enough?

Interest income, which grew 21% to $5.8 Billion, was the main driver of American Express’ record revenue. American Express, unlike Visa and Mastercard is also a lending institution, so it earns both swipe fees and interest income.

Its non-interest revenue, derived primarily through swipe and annual fees was $12.6 billion. This is a 5% increase year-over-year.

Card members borrowed $131 billion from American Express, a 14% increase. American Express cards-in force, or cards in circulation, increased 5% year-over-year in the quarter. New cards issued also increased 10% to 3.3 millions. The average fee per card also increased by 11%, to $101.

All of this contributed to a 39% rise in net income, and a 44% increase in earnings per share. It is important to note that the sale of Accertify in the second quarter boosted EPS. Adjusted EPS excluding the transaction was $3.49, still a 21% increase year-over-year.

Stephen Squeri said that since the end of 2021 we have grown our business significantly, adding nearly 23 million new cards, and over 30 millions merchant locations, as well as adding around 23,000,000 new cards. This increased scale, coupled with our high-quality, premium customers, our well controlled expense base, and our successful investments in continuously enhancing our membership model, fuels earnings power for the core business.

Outlook for growth

The momentum is expected continue, as American Express has raised its earnings guidance from $12.65 to $14.15 per share to $13.30 to $14.80 per share. This would be a gain of 18% to 23% over 2023. In line with previous guidance, revenue growth is expected to be between 9% and 11% this year.

American Express has also improved its cash position to $53 billion. This will allow it to increase its marketing expenditure by 15% over the previous year.

After American Express released its Q2 earnings report on Friday morning, the stock price target was not upgraded. The consensus 12-month price is $253, which is only 5% more than it is currently. It is up 29% year-to-date.

Buying Opportunity

I think that today’s stock market sell-off is a good opportunity for investors to buy, since American Express is an excellent company and Friday’s decline makes it a bit cheaper. It has a current P/E ratio.

It is one of only four major credit card/payment processing companies, so it has a nice moat surrounding its business. It is unique in the industry because it caters to wealthy clients, making it less susceptible to changes in consumer spending.

American Express is one of Warren Buffett’s largest and longest-held positions in Berkshire Hathaway. Investors looking for a reliable, solid long-term investment should consider this stock.

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