THE S&P500 is on a tear, and a title that climbs next to it is American Express (AXP -0.03%). American Express has a long track record of success in the market, thanks to its iconic brand and consumer positioning. Warren Buffett’s longtime stock has gained nearly 62% since hitting a 52-week low last October, and it now trades at a premium valuation.
Here’s what you should consider if you’re considering purchasing American Express today.
The luxury appeal of American Express
According to WalletHub data, American Express holds 19.6% of the credit card market’s purchasing volume. This makes it the third largest payment network in the United States, behind Visa (share of 52.6%) and MasterCard (share of 23.7%).
What makes American Express unique is its positioning with consumers. The company has spent years creating a brand associated with luxury and the finer things in life. The Centurion Card (aka The Black Card) is available by invitation only and would require customers to spend between $500,000 and $1 million per year be invited. In the meantime, The Platinum card requires an annual fee of $695. Both cards are aimed at high-spending customers with expensive tastes and offer perks and rewards from high-end travel providers, luxury hotels, airlines and high-end clothing lines.
The strong brand and positioning of American Express are the main reasons why the title has become a must-have in Berkshire Hathawayof the investment portfolio for years. In an interview with Bloomberg, Berkshire CEO Warren Buffett said, “I can’t put into people’s minds what they think about American Express. »
Investors should be aware of this risk
American Express competes with Visa and Mastercard, but you can’t compare the two companies based on their valuation alone. Today American Express costs 20 times the winningswhile Visa and Mastercard are priced at 32 and 41, respectively.
Despite what it looks like, American Express isn’t necessarily a good deal. Instead, its business is slightly different from those competitors. In fact, it maintains credit card loans in addition to processing payments through its network. Visa and Mastercard only process payments, while their banking partners hold these credit card loans. Because of this additional risk, American Express’s valuation tends to be lower and the company is more comparable to a bank.
It is for this reason that American Express investors want to monitor the company’s credit indicators. When the economy is healthy and consumer spending is robust, investors don’t have to worry much about credit metrics. However, now may be the time to exercise more caution.
Consumer credit card debt stands at $1.13 trillion, having increased 32% over the past two years. This happens when credit card interest rates are they were the highest in decades, which could put pressure on consumers. Signs of stress begin to appear. The delinquency rate for commercial bank credit card loans was 3.2% in the fourth quarter, the highest quarterly level since 2011, according to the Federal Reserve.
Buy, sell or hold American Express stock?
American Express is vulnerable to an economic downturn, which may lead to increased delinquencies. On the positive side, its customer base tends to have higher credit scores than its competitors and is more capable of weathering an economic downturn. In the fourth quarter, American Express wrote off 2% of its credit card loanswhich remains below pre-pandemic levels.
Despite the risk of rising delinquencies, American Express is trading at a premium to its recent history following the latest rise in its stock price. Today, the company is priced at 20.2 times earnings and 2.8 times sales, which is higher than its 10-year averages.
American consumption is strong, but signs of weakness are appearing. Bank of America CEO Brian Moynihan was specific in his comments on the consumer strength over the last two years. However, Moynihan said, “At some point, that consumer is going to slow down, and they have slowed down their spending,” noting that spending growth has fallen from 10% last year to 3% or 4% more recently.
American Express is a great company with a strong brand and deserves a place in investors’ portfolios. However, the stock Isn’t that the value it was a few months ago, and a potential slowdown in consumer spending or an increase in delinquencies could weigh on the company’s results in the coming quarters. Given the stock’s recent 62% rise, I give American Express a keep the note Today.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Bank of America, Berkshire Hathaway, Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Mad Motley has a disclosure policy.