Berkshire Hathaway has owned shares in some companies for decades, as CEO Warren Buffett once said that his favorite holding period is forever. The average investor could benefit from peeking at the Oracle of Omaha's portfolio.
While American Express (AXP 1.00%) has been a longtime holding for Berkshire and Buffett, its stock has done particularly well in the last three years, rising 65% during that time (as of Aug. 14). This performance crushes the 33% gain of the broader S&P 500 index.
Let's take a closer look at what makes American Express special, as well as its latest financials and why investors should consider buying the stock right now.
Competitive advantages
Buffett loves businesses with competitive advantages, and American Express fits the bill. It has developed a strong premium brand in the industry. The brand is estimated to be worth $22 billion, according to Interbrand. This makes it the second-most valuable brand in the financial services space.
The brand's premium status has been more successful at attracting higher-income consumers than competitors. These customers want the perks and benefits of being an Amex cardholder. And because the business operates a spend-centric model, which means the bulk of its revenue comes from usage as opposed to interest payments, its credit losses can be minimized in periods of economic downturn.
Buffett appreciates companies that possess strong brands. Some of Berkshire's top holdings are Apple, Coca-Cola, and Kraft Heinz.
With cardholders on one side and merchants on the other, Amex's payment platform also benefits from powerful network effects. With more merchants that take Amex as a method of payment, customers can spend at more places. And because of an expanding cardholder base, particularly with higher spending power, businesses want to accept these cards. In the U.S., Amex is now accepted nearly everywhere that credit cards are.
NYSE: AXP
Key Data Points
Latest results
American Express' stock performance over the past three years has been driven by strong fundamental performance, momentum that has carried over into 2023. In the most recent quarter (Q2 2023 ended June 30), revenue (net of interest expense) of $15.1 billion and diluted earnings per share (EPS) of $2.89 increased 12% year over year. That profit metric, bolstered by a constantly shrinking outstanding share count, was a record for the company.
Rising interest rates usually benefit lending businesses because they can charge higher rates on their loans. This explains why Amex's net interest income soared 32% last quarter. There's a flip side to this, and that's greater default risk. Card member loans that were 30 days past due were 1.2% of the total outstanding balances, up from 0.7% in Q2 2022. However, that figure is still well below pre-pandemic levels.
Management feels confident about the near term, forecasting revenue growth of 16% (at the midpoint) in 2023 and more than 10% next year. Diluted EPS is also expected to increase by double-digit percentages. That should help propel the stock.
Attractive valuation
While Buffett has long been an owner of American Express shares, individual investors should consider buying the stock today because of its attractive valuation. As of this writing, shares are trading at a trailing price-to-earnings (P/E) ratio of 16.9, which is cheaper than their past five-year average of 19. American Express is also selling at a sizable discount to the S&P 500's P/E multiple of 20.4.
And on a forward-looking basis, the stock is trading at less than 15 times earnings. This gives investors a good opportunity to add this top financial company to their portfolios, following in Buffett's footsteps.
