The S&P 500 is on a tear, and one stock surging alongside it is American Express(NYSE: AXP). American Express has a long track record of success in the market, thanks to its iconic branding and positioning among consumers. The longtime Warren Buffett stock has gained almost 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 thinking about buying American Express today.
American Express' luxury appeal
According to data from WalletHub, American Express has a 19.6% share of the credit card market purchase volume. That makes it the third-largest payment network in the U.S., trailing only Visa (52.6% share) and Mastercard (23.7% share).
What makes American Express unique is its positioning among 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 invite-only and reportedly requires customers to spend anywhere from $500,000 to $1 million annually to be invited. Meanwhile, The Platinum Card commands a $695 annual fee. Both cards are geared toward high-spend customers with expensive tastes and offer perks and rewards with high-end travel providers, luxury hotels, airlines, and high-end clothing lines.
American Express' strong branding and positioning are significant reasons the stock has been a staple in Berkshire Hathaway's investment portfolio for years. In an interview with Bloomberg, Berkshire CEO Warren Buffett said: "I can't put in the minds of people what is in their minds about American Express."
Image source: Getty Images.
Investors should be aware of this risk
American Express competes with Visa and Mastercard, but you can't compare the two businesses on valuation alone. Today, American Express is priced at 20 times earnings, while Visa and Mastercard are priced at 32 and 41, respectively.
Despite what it looks like, American Express isn't necessarily a bargain. Instead, its business is slightly different from these competitors. That's because it holds on to credit card loans in addition to processing payments through its network. Visa and Mastercard only process payments, while their banking partners hold on to those credit card loans. Because of this added risk, American Express' valuation tends to be lower and the company is more comparable to a bank.
For this reason, investors in American Express want to monitor the company's credit metrics. When the economy is healthy and consumer spending is robust, investors don't have to worry much about credit metrics. However, now may be a time for more caution.
Consumer credit card debt is $1.13 trillion, having increased 32% over the past two years. This comes when credit card interest rates are the highest they've been in decades, which could pressure consumers. Signs of stress are beginning to emerge. According to the Federal Reserve, the delinquency rate on credit card loans at commercial banks was 3.2% in the fourth quarter, the highest quarterly level since 2011.
US Credit Card Debt data by YCharts
Buy, sell, or hold American Express stock?
American Express is vulnerable to an economic downturn, which can cause delinquencies to move higher. On the plus side, its customer base tends to have higher credit scores than competitors' and is more capable of riding out an economic downturn. In the fourth quarter, American Express wrote off 2% of its credit card loans, which remains below pre-pandemic levels.
Despite the risk of rising delinquencies, American Express trades at a premium to recent history following the latest run-up in its stock price. Today, the company is priced at 20.2 times earnings and 2.8 times sales, which are above its 10-year averages.
AXP PE Ratio data by YCharts
The U.S. consumer is strong, but signs of weakness are emerging. Bank of America CEO Brian Moynihan has been accurate in his calls about the strength of the consumer over the past couple of years. However, Moynihan said: "At some point, that consumer will slow down, and they have slowed down their spending," noting that spending growth has gone from 10% last year down to 3% to 4% more recently.
American Express is an excellent company with a strong brand, and it deserves a spot in investors' portfolios. However, the stock isn't the value it was a few months ago, and a potential slowdown in consumer spending or an uptick in delinquencies could weigh on the company's earnings in the next few quarters. Given the recent 62% increase in the stock, I give American Express a hold rating today.
Should you invest $1,000 in American Express right now?
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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 has positions in 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 Motley Fool has a disclosure policy.
