Dow component American Express Company (AXP) reports fourth quarter 2020 results in Tuesday’s premarket, with analysts expecting earnings of $1.30 per share on $9.32 billion in revenue. If met, earnings per share (EPS) will mark a 36% decline in earnings from the same quarter in 2020. The stock has fallen 16% in six sessions after missing third-quarter earnings estimates in October, as investors jumped in reaction to a 20.4% drop in revenue and stubbornly high credit reserves.
Key points to remember
- American Express is strongly linked to business and leisure travel.
- The company reports its fourth quarter 2020 results during Tuesday’s premarket.
- An aggressive distribution below the surface suggests little upside potential.
Amex’s performance is more tied to business and leisure travel than its rivals Visa Inc. (V) and Mastercard Incorporated (MY). This concentration provided a competitive advantage when jumbo jets ferried white-collar workers across the planet, but now marks a major headwind as the pandemic forces the business world to use virtual meeting space apps. This digital activity is likely to persist long after the virus has run its course, given the huge savings to business travel budgets.
The company reported progress on credit default levels in December, with net lending to credit cardholders in the United States to write down to 1.6% from 1.9% in November. Net charge-offs from small business cards in the United States performed even better, falling to 1.5% from 2.3% the previous month. Loans over 30 days in arrears in both segments have now fallen back into the 0.7% to 1.0% range, significantly below the 1.6% to 1.7% range earlier in the pandemic .
The Wall Street consensus has been mixed for months, with an “overweight” rating based on 11 “buy”, 13 “hold” and a “sell” recommendation. Price targets currently range from a low of $91 to a high of $175, while the stock is expected to open Monday’s session less than $4 below the midpoint target of $130. This humble placement seems appropriate, given the depth of the second pandemic wave and the horribly slow rollout of vaccines across the planet.
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American Express Weekly Chart (2013-2021)
The stock surpassed the 2007 high of $65.89 in 2013 and peaked in the mid-$90s in the summer of 2014. A drop in the first quarter of 2016 tested new Support successfully, before a wave of recovery that made a 100% round trip to the previous high at the end of 2017. The price action completed a breakout in the second half of 2018, generating impressive gains through the January 2020 high at $138.13.
The pandemic decline failed, sending Amex to its lowest since the 2016 election, while the rebound in June recouped about three-quarters of the loss. The stock posted a higher low in October and widened above resistance in November, extending within nine points of the 2020 high last week. It has now passed the .786 Fibonacci Sell Retracement level, favoring a rapid advance that completes a 100% retracement.
However, the volume tells a bearish story, with the balance volume (OBV) accumulation-distribution indicator entering a wave of distribution in December, although its price has gained ground since then. Worryingly, OBV has now fallen to the same level as in March, when the stock traded almost 40 points lower. This bearish divergence won’t stop a rally to the previous high, but it does warn that the upside is on shaky ground, vulnerable to a deep slide that could begin at any time.
American Express will release its fourth-quarter results this week, with an unfavorable reward-risk ratio suggesting investors are staying on the sidelines, seeking opportunities less exposed to business travel.
Disclosure: The author held no position in the aforementioned titles at the time of publication.