Dow component American Express Company (AXP) reports fourth-quarter 2020 earnings in Tuesday's pre-market, with analysts expecting a profit of $1.30 per share on $9.32 billion in revenue. If met, earnings per share (EPS) will mark a 36% profit decrease compared to the same quarter in 2020. The stock fell 16% in six sessions after missing third-quarter earnings estimates in October, with investors jumping ship in reaction to a 20.4% revenue decline and stubbornly high credit reserves.

Key Takeaways

  • American Express is highly levered to business and recreational travel.
  • The company reports fourth quarter 2020 earnings in Tuesday's pre-market.
  • Aggressive distribution under the surface suggests little upside potential.

Amex's Performance

Amex's performance is more levered to business and recreational travel than that of rivals Visa Inc. (V) and Mastercard Incorporated (MA). That focus offered a competitive edge when jumbo jets transported white-collar workers across the planet but now marks a major headwind, with the pandemic forcing the business world onto virtual meeting space applications. This digital activity is likely to persist long after the virus runs its course, given the huge savings in corporate travel budgets.

The company reported progress on credit delinquency levels in December, with the U.S. Consumer Card Member loans net write-off rate dropping to 1.6% from 1.9% in November. U.S. Small Business Card net write-offs performed even better, declining to 1.5% from 2.3% in the prior month. Loans more than 30 days overdue in both segments have now dropped back to the 0.7% to 1.0% range, substantially lower than the 1.6% to 1.7% range earlier in the pandemic.

Wall Street consensus has been mixed for months, with an "Overweight" rating based upon 11 "Buy," 13 "Hold," and one "Sell" recommendation. Price targets currently range from a low of $91 to a Street-high $175, while the stock is set to open Monday's session less than $4 below the median $130 target. This humble placement seems appropriate, given the depth of the second pandemic wave and horrifically slow vaccine rollout around the planet.

Tip

Payment delinquency is commonly used to describe a situation in which a borrower misses the due date for a single scheduled payment for a form of financing, like student loans, mortgages, credit card balances, or automobile loans, as well as unsecured personal loans. There are consequences for delinquency, depending on the type of loan, the duration, and the cause of the delinquency.

American Express Weekly Chart (2013–2021)

Chart showing the share price performance of American Express Company (AXP)

TradingView.com

The stock broke out above the 2007 high at $65.89 in 2013 and topped out in the mid-$90s in the summer of 2014. A decline into the first quarter of 2016 tested new support successfully, ahead of a recovery wave that completed a 100% round trip into the prior high at the end of 2017. Price action completed a breakout in the second half of 2018, generating impressive gains into January 2020's high at $138.13.

The pandemic decline failed the breakout, dropping Amex to the lowest low since the 2016 election, while the bounce into June recouped about three-quarters of the loss. The stock posted a higher low in October and gapped above resistance in November, stretching within nine points of the 2020 high last week. It has now exceeded the .786 Fibonacci sell-off retracement level, favoring a rapid advance that completes a 100% retracement.

However, volume is telling a bearish tale, with the on-balance volume (OBV) accumulation-distribution indicator entering a distribution wave in December, even though its price has gained ground since that time. Ominously, OBV has now dropped to the same level as in March, when the stock was trading nearly 40 points lower. This bearish divergence won't stop a rally into the prior high, but it does warn that the uptick is on shaky ground, vulnerable to a deep slide that could start at any time.

Tip

Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening and in some cases may lead to the price changing direction.

The Bottom Line

American Express will report fourth-quarter earnings this week, with adverse reward-to-risk suggesting that investors remain on the sidelines, looking for opportunities with less exposure to business travel.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.