Trailing the S&P 500's and Nasdaq Composite's 14% and 31% respective gains this year with an anemic 3% gain, American Express (AXP +3.23%) stock's underperformance is a buying opportunity for investors. This holds particularly true in light of the integrated-payment specialist's continued strong fundamentals during this period and management's expectations for more robust growth for the foreseeable future. The pot is further sweetened by the stock's cheap and attractive valuation.
While it's tempting to let fears about a potential recession keep you away from financial companies' shares these days, these same fears are making some stocks in the sector -- even high-quality ones like American Express -- trade at prices that give investors good entry points.
NYSE: AXP
Key Data Points
Uncertainty is already priced in
Leading up to the company's third-quarter earnings report later this month, analysts have expressed some concerns about the company's revenue coming in below the consensus forecast as consumer spending has been pressured by tightening measures from the Federal Reserve. Even some bullish analysts on the stock seem skittish about the company's near-term performance.
Sure, some of Wall Street's concerns about short-term challenges for American Express could be valid. But focusing on the near term may be a losing strategy.
Consider this: Even if American Express' third-quarter results are below expectations, the stock may have already priced this expectation in. Shares trade at just 15x earnings -- a steep discount, compared to the average price-to-earnings ratio of 19 for stocks in the S&P 500. This valuation is also far below peers Visa and Mastercard. These credit card companies have price-to-earnings ratios of 30 and 37, respectively.
With this in mind, any further downside to American Express stock could be minimal. In short, there's a risk that investors waiting for a big pullback may never get it.
But even if a big pullback does occur, it's the long-term returns from today's price that really matter. From this perspective, shares look attractive. Investors, of course, should be willing to hold shares through volatility.
Stabilizing trends
Further, management has been telling investors a different story about spending trends. As recently as Sept. 13, American Express Vice Chairman Doug Buckminster said during a meeting with analysts that "we feel like our volumes are stable ... [and] sufficient for us to meet our '23 revenue guidance as we said in Q2."
What did the company say in Q2? It reconfirmed its full-year guidance for total 2023 revenue to rise 15% to 17% year over year and for earnings per share to increase approximately 12% to 16%.
In addition, management said it once again expects third-quarter growth to be well below the 22% growth the company delivered in Q1, as growth was elevated in the beginning of the year because the company was lapping the impact of reduced spending due to the COVID-19 Omicron variant. So revenue growth in Q3 will more likely be closer to the still-robust 12% growth the company achieved in Q2.
Contrary to Wall Street's concerns about high levels of uncertainty surrounding American Express' business today, management emphasized a handful of times during its second-quarter earnings call that it's been seeing "stabilization" in its business trends. Further, management said its second-quarter growth already represents what the company can achieve in a "low-growth economy."
Fast-growing, subscription-like revenue
Much of management's confidence in its business growth prospects is due to the uniqueness of its business model, built largely around fee-based premium products. This gives the company a fast-growing stream of subscription-like revenue, which is much easier to forecast than spending volume.
The company's quality brand and powerful business model also give management confidence in its long-term expectations. American Express expects revenue to grow at a rate of 10% or greater and earnings per share to increase at rates in the mid-teens annually in 2024 and for the foreseeable future.
"I continue to feel very good about our ability to achieve these long-term aspirations," said American Express CEO Stephen Squeri in the company's second-quarter earnings call.
We'll know more about the company's business trajectory soon. The company reports third-quarter results before the market open next Friday.
Whether shares pull back in the near term or not, the stock's valuation relative to the strength of the company's underlying business looks extremely compelling today. Shares are currently trading at just 13.5x the midpoint of management's full-year earnings-per-share guidance range. It's uncommon for such a high-quality, fast-growing company to trade at such a cheap valuation.
A buying opportunity this good may not last long. It may be better, therefore, to buy American Express shares now, as opposed to trying to time when and to what degree the stock will trough.
