The company’s resilient performance has lifted the stock to new heights.
American Express (AXP 0.38%) has been on a roll this year. The stock has soared nearly 60% without too much stress. Shares have only dipped 10% or more once since last fall. It seems like a matter of time before the stock hits $300.
However, some potential roadblocks exist. Personal savings rates among U.S. consumers are at decade lows, and total credit card debt in America is at all-time highs. In other words, people are financially exhausted.
Should investors follow the momentum and buy shares today? Or is American Express poised for a letdown?
What recession?
Various consumer-facing companies have cited weaker spending in their mid-year earnings, but American Express isn’t feeling the pain. The company reported solid underlying metrics in its second-quarter report. Net revenue grew 8% year over year in Q2, driven by 6% growth in billed business.
Growth has slowed since the years following COVID-19, which makes perfect sense. The stimulus money that juiced the economy (and inflation) has dried up. However, I would argue that 8% revenue growth is satisfactory at a time when people are pushing back on higher prices at places like McDonald’s.
Image source: American Express.
Perhaps more important than people spending money is that American Express’ customers pay their bills. As you can see above, late payments and defaults are below pre-pandemic levels.
This is important to watch moving forward. For now, it looks like economic pressure isn’t affecting American Express. Its credit card is generally seen as a premium brand, so it may perform better than typical lenders in a recession scenario.
Solid growth ahead
American Express and its shareholders could enjoy solid growth over the next several years if spending remains resilient. The consensus among analysts is that the company will grow revenue between 8% and 9% annually from this year through 2026.
The company also raised full-year earnings-per-share (EPS) guidance in Q2 from a $12.65-to-$13.15 range to a $13.30-to-$13.80 range. That’s as high as 23% year-over-year growth. Analysts estimate the company will grow earnings by an average of 15% annually over the next three to five years.
Given whispers of a looming recession, the economy could still drag on American Express. However, management noted on the company’s Q2 earnings call that the core business comfortably supports 15% earnings growth, even in what management described as a slower growth environment. All bets are off in a severe economic downturn, but it does signal confidence in American Express’ business momentum.
Should investors buy the stock?
American Express shares seem reasonably priced, even after the stock’s 60% run. The stock trades at 18 times the updated earnings guidance from management, on par with American Express’ average price-to-earnings ratio over the past decade.
The stock pays a 1.1% dividend yield, so the stock could produce annual total returns of around 16% over the next several years if it delivers on expectations and maintains its current valuation. Suppose the U.S. enters a mild recession. Cutting earnings growth rates in half from the estimated 15% would still give the stock a shot at high-single-digit annualized investment returns.
That makes American Express a solid position to own today, even as it chugs toward $300 per share. Investors can still make money in the stock if they’re willing to hold through what should be multiple years of double-digit earnings growth.
Again, this all changes if there is some economic crisis. A severe recession could wipe out American Express’ earnings growth and hurt the stock. However, predicting events like 2008-2009 or 2020 is virtually impossible. Lending is part of American Express’ business model, so you’ll never avoid that risk altogether. Use portfolio diversification instead to buffer your portfolio from the risk of investing in lenders like American Express.
Regardless of how the economy goes in the near term, American Express has been around since the mid-1800s, and will likely be around for many years into the future.
American Express is an advertising partner of The Ascent, a Motley Fool company. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
