American Express Company (NYSE:AXP) has long been a Buffett favorite and a deeper look reveals precisely why. The company is also an almost fixed holding asset of the “Oracle of Omaha,” aka Warren Buffett and remains one of his top five holdings to this day.
The card giant has built an empire on the backs of its popular Amex cards and despite a massive network already built it has innovation levers galore.
Over the past five years, American Express’ stock has gained more than 140%. Just for comparison, the broader SPDR S&P 500 ETF Trust (NYSEARCA:SPY) just over 80% over the same period. The share price momentum indicates a strong base of investors with high conviction but can it sustain this upward trend amid valuation concerns?
What Sets American Express Apart?
American Express offers an integrated payment platform with global reach. Services include card network businesses and merchant-issuing businesses. The company has been operating since 1850 when it operated as a freight forwarding business.
In 1958, American Express issued its first card (a charge card), which was a shift from its earlier business, but the company already had a loyal customer following from its previous businesses. Since then, its goal has been to expand its card business.
Amex has a strong international presence, but if there is one area where competitors are outperforming, it is international acceptability.
The two biggest competitors American Express has currently are Visa Inc. (NYSE:V) and Mastercard Incorporated (NYSE:MA) but what sets American Express apart is it’s the only company out of the three that works as a card issuer and a payment network, while its competitors only function as payment networks.
So, what exactly is a card issuing company?
Amex Can Actually Extend Credit, Unlike Rivals
A card-issuing company like American Express can actually extend credit to its customers. Payment networks like Visa and Mastercard facilitate a transaction, so when customers take credit instead of paying upfront using their cards, they also have to deal with a card issuer (typically a bank). In the case of an Amex card, consumers only have to deal with American Express only.
When it comes to domestic acceptance, all three companies’ cards are at a 99% acceptance rate in the U.S. It is in the international markets that Visa and Mastercard stand head and shoulder above American Express. This is likely because it is hard to qualify for an Amex credit card, as their cards require a “good” quality score.
Warren Buffett is a big fan of American Express. Buffett made his first investment in the company back in 1964. It was one of the best investments in Buffett’s career, and he has never looked back, holding a multi-billion dollar stake in the firm to this day.
He was heard saying to Bloomberg, “You can’t create another American Express” and has clasped onto his AMEX position through boom and bust economies. As of September 30, 2024, Buffett’s holding company, Berkshire Hathaway, held a 21.5% stake in American Express.
These days AMEX is no longer just a luxury card provider but has won favor among Millennial and GenZ customers in particular. It has also expanded internationally through its travel benefits.
The changes regarding fees and perks associated with its Platinum card, now rebranded as a lifestyle card, were welcomed by consumers as Platinum cardholders grew, particularly in the GenZ cohort. Seems like Buffett was right about this financial behemoth.
How Is American Express Performing Now?
Management has last reported its third quarterly results for fiscal 2024 and for the most part the numbers were upbeat.
Total revenues net of interest expense came in at $16.64 billion, growing by 8% from the prior year’s period. This was the tenth consecutive quarter that it reported record revenues.
Cards performed especially well, which contributed to the top line expansion. Total Card Member spending increased by 6% too, and card fee revenue growth grew to 18%. Consumer numbers are growing also as evidenced by management reporting 3.3 million new card acquisitions. The company also saw high retention rates.
Change has been the name of the game for American Express, and a revamp of its portfolio, which has turned the company around from the pandemic lows, is still continuing. The company completed 40 product refreshes globally from the beginning of 2024 to the end of Q3.
What’s even more promising is that after the launch of its Amex Consumer Gold card, the company observed that it was quite popular among its millennial and Gen Z customers. This becomes important as it’s the fastest-growing consumer cohort in the U.S.
Is American Express Stock Going Lower?
American Express stock is likely going lower to $303.18 per share, at least in the eyes of the 25 analysts covering the stock now.
So too a discounted cash flow forecast analysis hints at even greater risk to owners of AXP shares now with a $286 per share fair value assessment calculated by our analysis.
Trading at 22.9x earnings and offering a 0.99% dividend, American Express isn’t a steal by any means but it’s not so elevated that new investors planning to hold for the long term should be overly concerned. With that said the reward to risk ratio skews now towards negative expectancy.
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