American Express Company (AXP), Toll Brothers Inc (TOL): Consumer Borrowing Is up, Stick to These High-End Players

“Consumer borrowing in the U.S. climbed in May by the most in a year,” according to Bloomberg. Credit cards, school loans, and automobile loans led the list. While increased spending, particularly using debt, is a good sign, rising rates could materially alter this trend. Stick to higher-end players like American Express Company (NYSE:AXP) and Toll Brothers Inc (NYSE:TOL).

Spending Again

Americans appear to be spending again. That’s a good sign since consumer spending makes up around 70% of gross domestic product. The housing market finally starting to pick up, a resilient stock market, and an improving employment picture have all helped push people to start taking advantage of the historically low interest rate environment.

However, rising rates have also spurred people to act while low rates are still available. That has likely pulled some big ticket sales from the future into today’s numbers. If rates keep heading higher, there’s likely to be a tipping point where growth stalls because debt costs become a hindrance to spending. If we hit that wall, some of the companies benefiting today could see results turn quickly lower.

Higher end consumers, however, have managed the recession and weak recovery much better than less affluent consumers. So the best way to play the improvement in consumer spending is to stick to companies serving those with the wherewithal to keep spending even if rates move higher.

Not Your Average Card

The best way to describe American Express Company (NYSE:AXP) is to call it the credit card for rich people. It’s built an impressive reputation on customer service and exclusivity. Although it’s been branching out to reach more consumers, it remains focused around high-end clientele. Such customers earn more, spend more, and pay their bills more reliably than the lower strata.

The strength of the company’s core customers was on display during the 2007 to 2009 recession. Competitor Mastercard Inc (NYSE:MA) lost almost $2 a share in 2008. The lowest American Express Company (NYSE:AXP)’ earnings fell was to $1.50 or so a share in 2009.

Although Mastercard Inc (NYSE:MA) is a great business, that swift fall was the result of customers reigning in their spending at the same time as weaker borrowers were defaulting. American Express Company (NYSE:AXP)’ customer base is simply of a higher caliber. Mastercard Inc (NYSE:MA)’s bottom-line has advanced quickly since that low, reaching nearly $22 a share last year, but it is also trading near all-time highs with a price to earnings ratio of about 26. If earnings stall, the shares could fall quickly.