The global economy was booming coming out of the COVID-19 pandemic -- so much so that governments around the world have been faced with excessive inflation, a problem that occurs when demand for goods and services outstrips supply. But two categories that people are still throwing money at are travel and entertainment.
So which companies can be expected to benefit from that heavy travel and entertainment spending? One at the center of this growth is credit card veteran American Express (AXP -0.62%). The venerable financial institution's payment volumes in the travel and entertainment category grew by 39% year over year in the first quarter as its customers spent freely on flights, hotels, and other vacation expenses.
But does all this make American Express a can't-miss financial sector stock for investors to buy now?
Growth from millennials
American Express makes money through credit card fees, payment transactions, and loans made to its cardholders. Its two key performance indicators are total cards in circulation and overall payment volume across its network.
Both numbers are looking fantastic at the moment. In the first quarter, American Express acquired 3.4 million net new cardholders, up from 3 million in the prior-year period. Total payment volume grew 16% year over year to $399 billion, with a huge boost from the aforementioned travel and entertainment category.
This growth is mainly coming from people in the millennial and Gen Z demographics, who are now aging into their prime credit card-using years. On the Q4 2022 conference call with analysts, American Express management said that around 60% of its new card acquisitions are coming from millennial and Gen Z customers, a huge change from a decade ago. Investors can rest assured that American Express is not being snubbed by younger generations.
Acquiring those younger customers to the American Express ecosystem will be extremely valuable to the business over the long term. Thanks to card points, lock-in benefits, and other switching costs, customers typically stick with one primary credit card provider for many years. If American Express is locking in customers while they are under 30, their lifetime values should be quite large, and provide a tailwind for American Express spending volumes as customers age into their prime earning years.
Widening competitive advantage, rational capital allocation
On top of strong growth, American Express has a fantastic competitive advantage. This moat is why the stock is one of Warren Buffett's largest holdings. Berkshire Hathaway owns 20% of American Express's common shares outstanding.
American Express's moat comes from the network effect of merchant acceptance and cards in circulation. Merchants accept American Express because of how many AmEx cards there are in circulation, and consumers favor those cards because they are widely accepted around the world.
Any would-be competitor would have to convince millions of merchants to accept their card while simultaneously getting millions of cards in circulation in order to slow down American Express and the other scaled card networks. This is a tall task that few companies have ever tried. All have failed.
This moat has allowed American Express to earn outsized profits for decades. With these profits, management has consistently repurchased its outstanding shares. 25 years ago, it had 1.5 billion shares outstanding. Today, it has fewer than 750 million.
AXP Shares Outstanding data by YCharts.
Is the stock cheap?
Management thinks it can earn at least $11 per share in profits this year. Compared to its stock price of about $170, that gives American Express a forward price-to-earnings ratio of 15.5, which is well below the market average.
Over the long term, management is guiding for earnings per share to grow at a compound annual percentage rate in the mid-teens through steady share buybacks and growth of its card network business. If that outlook proves correct, the stock will likely do well for shareholders this decade, making American Express stock an easy buy at these prices for those looking to hold it for the long term.
