Many consider Warren Buffett to be the greatest investor ever. His track record leading Berkshire Hathaway certainly makes a strong case. Today, there are dozens of stocks among the company's public equities holdings.
Among the top five positions that the Oracle of Omaha owns through his conglomerate, investors will see American Express (AXP 1.39%). This leading card issuer and payments network represents 6.4% of Berkshire's portfolio, worth a value of $21.5 billion as of this writing. In fact, Berkshire owns more than 20% of AmEx's outstanding shares.
This top financial stock just reported strong results for its latest quarter. Let's dive deeper into AmEx's latest numbers, as well as why investors should consider adding the stock to their portfolios today.
Sizing up the latest quarter
For its third quarter, American Express reported revenue, net of interest expense, of $15.4 billion and diluted earnings per share of $3.30, both record figures for the business. Moreover, while the top-line number was up 13% year over year, the bottom line surged 34%.
Given the pace of interest-rate increases the Federal Reserve has undertaken, American Express's results are all the more impressive. A macro headwind like this, coupled with inflationary pressures, should pose a serious threat to businesses in the lending industry. But AmEx processed $420 billion in payments volume last quarter, a 7% increase over Q3 2022. And the company saw its net interest income jump 34% to over $3.4 billion.
What's more, AmEx added 2.9 million net new cardholders in the most recent three-month period, bringing the total to 138.2 million. Investors are right to worry that higher defaults could be a major near-term risk. But it's worth mentioning that the net charge-off rate of 1.8% was still below pre-pandemic levels.
Once again, AmEx saw strong growth with the Generation Z and millennial demographic, which was its fastest-growing customer cohort. And as was the case in previous quarters, travel and entertainment spending increased by double digits.
Looking ahead, the management team reiterated its full-year 2023 guidance. They still believe AmEx will register a 16% and 14% gain at the midpoints, respectively, with revenue and earnings per share. If these estimates become reality, that would represent impressive growth. Double-digit gains are on the horizon in 2024 as well.
Why now is the time to buy American Express
As of Oct. 20, shares of American Express have dropped 4% in 2023. That's a huge disappointment when compared to the 10% gain of the S&P 500. For a business that continues posting solid financial results, this disparity in performance doesn't make sense.
But investors can take advantage of this opportunity right now and buy the stock at an attractive valuation. AmEx shares trade at a trailing price-to-earnings (P/E) ratio of just 14.4. That's below the trailing five-year average multiple of 18.5. And it's a notable discount to the S&P 500's P/E ratio of 19.2.
Should AmEx's valuation get to par with the broader market index, while at the same time earnings increase by double digits next year, as management thinks will happen, then the stock is poised to reward shareholders who are willing to buy today
AmEx also makes for a great investment over the long run. It has an economic moat in the form of its powerful brand, which is globally recognized as the premier card-issuing entity. This adds tremendous durability to the business. It's difficult to envision a world a decade or two from now where AmEx isn't thriving.
Perhaps that longevity, coupled with the cheap valuation, is why Buffett and Berkshire remain big-time shareholders. The average investor should follow suit.
