Morgan Stanley upgrades American Express, says higher-income customer base should continue spending in 2023

Published Wed, Feb 8 20236:06 AM EST

A higher-income leaning customer base should position American Express well to ride out a year projected to see a strong uptick in delinquencies, Morgan Stanley said. Analyst Betsy Graseck upgraded shares of the payments card issuer to overweight from equal weight, saying that credit losses pose less of a risk given the company's higher credit score customers. "AXP has a lower risk credit skew with higher FICO card members (5% subprime vs. peer median of ~20%), and we see credit losses hitting pre-COVID levels only by 2024 while all other card peers will overshoot on deterioration," she said in a note to clients Wednesday. The upgrade from Morgan Stanley comes after the credit card issuer surged last month after issuing strong guidance and dividend hike, despite weaker-than-expected fourth-quarter results. So far this year, shares are up 21%. AXP YTD mountain Shares of American Express since the start of 2023 Graseck also expects greater than 15% revenue growth for the company in 2023 as corporate spending recovers, card fees grow, the U.S. dollar weakens and higher-income consumer continues spending despite inflation. "Amex's card members have only modest pressure from inflation against stock peers exposed to faster loss deterioration," she said. Moderating marketing and non-card operating expenses should provide about 400 basis points (4%) of positive operating leverage for the company going forward, the largest for the company in over a decade. This also positions the company as the "only positive operating leverage and EPS growth stories" within the firm's coverage through 2024, she noted. Given this backdrop, Graseck said that shares of American Express warrant a valuation premium to peers. She upped the firm's price target to $186 a share, representing 4% upside from Tuesday's close and a 16.5 price-to-earnings ratio. In the same note, Morgan Stanley downgraded shares of Discover Financial Services to equal weight from an overweight rating, citing the credit card company's post-earnings outperformance. According to Graseck, the "capital return story has been fully digested by the market." The stock's up more than 20% in 2023. "While rising credit losses are less of a risk to DFS vs. more subprime exposed peers, in our view, this pressure nonetheless weighs on EPS growth in 2023, expected to decline 12% y/y," she said. "We prefer the positive earnings growth story out of AXP, expected to see 15% EPS growth in 2023." — CNBC's Michael Bloom contributed reporting