Volatility has been driving the market for several months. Last week was exceptional, with massive gains following the Federal Reserve's latest move on interest rates on Wednesday giving way to equally large losses on Thursday. By the end of the week, the S&P 500 was lower than where it started.
While this understandably causes fear in the investor community, it also gives us a chance to see which stocks outperform when times are rough. One stock that's been beating the market this year and is still holding steady is American Express (AXP 0.07%), and this Warren Buffett favorite is trading at a dirt cheap valuation.
Image source: American Express.
Investing in the future
American Express has completely recovered from the pandemic despite travel, one of its core categories, still being under pressure. In the first quarter of 2022, revenue increased 29% year over year to $11.7 billion, with volume up 30%. And travel trends are beginning to reverse. Travel and entertainment spending was up 121% over last year, although still 12% below 2019 levels. It was most pronounced in airline spending, which increased 245% over last year.
CEO Stephen Squeri attributed the company's success to investments in "brand, customers, value propositions, coverage, technology, and talent." That's a lot of things to juggle, but each of them has contributed its part toward redefining American Express' position in its industry and bringing long-term success.
Much of this investment has been focused on effectively reaching beyond its traditional core cohort of high-income individuals to winning over small businesses and millennial shoppers. Spending reached a record in March, driven by millennial and Gen X spending, which increased 56% year over year. Customers are engaging more with digital and mobile options, as well as with new cardmember benefits. And although the company's major partners, such as Delta Air Lines and Hilton Worldwide Holdings, remain an important strategic element of the benefits program, it's adding more innovative partners to meet new demand, such as Vanguard financial advisement.
Small business volume increased 30% over last year, and small and medium-sized enterprises (SME) are becoming an increasingly large part of the company's overall business. Business from SMEs grew from 36% of billed business in 2019 to 38% this year.
Cardmember retention has significantly improved, and fees increased 14% year over year, accounting for 12% of total revenue. The year-over-year increase has accelerated over the past few quarters, and new card acquisitions have accelerated as well.
As for the future, management expects 18% to 20% year-over-year revenue growth for the full year, higher than long-term growth for 2023, and 10% or more for 2024 and beyond. Earnings per share is expected to increase in the mid teens. That's long-term double-digit growth. This takes into account a recovered economy, and forecasting out that long isn't necessarily reliable. However, it also takes into account economic trends over American Express' long history and how it has reacted. Considering the company's strengths and investments and how economic trends have played out in the past, investors can have some level of confidence in this projection.
Solid, safe, and cheap
American Express stock has outperformed the broader market over the long term as well, and you can see in this chart precisely how it lagged during the pandemic but is now back to its regular performance.
Shares of American Express stock trade at a trailing-12-month price-to-earnings (P/E) ratio of under 17, as compared with credit card processing giants Visa at 32, and Mastercard at 36. To be fair, there's more risk with American Express' loan business, which Visa and Mastercard don't have, since they provide a network and work together with banks, which provide the loans. As its own closed-loop network, American Express has some similarity with bank stocks, which typically trade at much lower P/E ratios.
American Express' future looks very bright, and shares are trading at what appears to be a very cheap price considering it expects long-term double-digit growth. No wonder it's been a longtime Buffett holding. Individual investors should also consider this no-brainer stock for their portfolios.
