Owning this business might be a good chance to gain exposure to the financial services industry.
Known for its premium credit card offerings, American Express (AXP 1.85%) is a powerhouse in the financial services sector. And if you have any doubts about this being a quality enterprise, it’s worth noting that Warren Buffett-led Berkshire Hathaway is a major investor, owning more than 21% of the business.
American Express is taking a hit in the past few days. Should investors buy this financial stock while it trades well below $250 per share?
Strong financial performance
The company’s stellar performance is extremely encouraging. During the three-month period that ended June 30, American Express reported revenue (net of interest expense) of $16.3 billion, which was up 8% year over year. This was driven by higher payment volume and 3.3 million new active cards. Moreover, Amex is seeing strong cross-border payments activity.
This is a very profitable business. In the past five years, the company’s net profit margin has averaged a superb 14.4%. Amex’s adjusted diluted earnings per share (EPS) of $3.49 increased 21% compared to Q2 2023. Share buybacks are a key part of management’s capital allocation plan that benefits investors.
The recent financial success is impressive because it’s happening during an uncertain economic period. Inflationary pressures continue to impact consumers. And there are still fears out there about a recession happening. But Amex is on a roll. Management even raised EPS guidance for 2024, revealing their near-term confidence.
Zooming out, the company’s long-term gains are also noteworthy. Revenue and adjusted diluted EPS in Q2 2024 were 51% and 69% higher, respectively, than in the same period in 2019. Amex has been and continues to be a compounding machine.
Wide economic moat
Besides strong financial performance, I’m sure Buffett appreciates Amex’s economic moat. I think the brand is a key asset that differentiates this company’s offerings in the competitive financial services industry. And this positioning isn’t likely to change anytime soon.
Thanks to its top-notch perks and rewards, Amex provides premium credit cards that do a good job of attracting affluent customers that have greater spending power than the average person. This leads to more revenue potential for the business. In recent times, American Express has been bringing on many younger card holders, a positive trend because these people can be lifelong customers whose spending rises over time.
Like Visa and Mastercard, Amex runs its own payment platform. Consequently, the business benefits from powerful network effects. On one side, there are cardholders. And on the other side, there are merchants. As the base of card members grows, the Amex network becomes more valuable to merchants. As the number of merchants that accept Amex grows, cardholders find more utility. It’s a virtuous cycle that makes the business better over time.
Good time to buy
Since hitting an all-time high of $253.04 on July 31, Amex shares are currently down about 11% (as of Aug. 5). This gives prospective investors a rare opportunity to buy a fantastic company on the dip.
The stock currently carries a price-to-earnings (P/E) ratio of 16.9. This represents a discount to the trailing-10-year average of 17.9, which is advantageous. Moreover, Amex shares are cheaper than the S&P 500‘s P/E multiple of 23.8. I view this as a good time to consider adding the business to your portfolio.
As Amex shares trade at a current price of $225.92, well below $250, the stock looks like a smart buy-and-hold candidate. Patient investors are set up to see solid returns over the next few years.
American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends 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 Motley Fool has a disclosure policy.
