It's been a tough year for finance stocks. The banking crisis in March put an unwanted spotlight on the sector, and financial stocks across the board have suffered. The looming recession threat also makes investors hesitant about consumer finance stocks. One blue-chip, Warren Buffett-backed stock that has fallen 20% since its recent high in July is American Express (AXP -0.62%).
Buffett's Berkshire Hathaway owns nearly 152 million shares of American Express, making it the third-largest holding in its investment portfolio. This long-term Buffett holding, which has been in Berkshire's portfolio since 1993, has taken a hit this year and recently fell over 4% in the days following its quarterly earnings announcement.
Is this a buyable dip for investors? Let's dive into its results to find out.
American Express' record quarter
American Express posted solid third-quarter earnings when it reported last week. Its revenue came in just above analysts' estimates, while its earnings per share (EPS) of $3.30 came in well above forecasts of $2.96. Company management also backed its full-year EPS and revenue growth guidance.
By all measures, American Express posted a solid quarter. Total network volume of $420 billion was up 7%, while total revenue and net income grew 13% and 30%, respectively, compared to the same quarter last year. The record quarter from the payments company was driven by robust spending by its premium customer base, led by travel and entertainment spending.
Image source: Getty Images.
An uptick in write-offs has affected sentiment
American Express posted a solid quarterly earnings report, so it was interesting that that stock dropped so much in the following days. The sell-off could be due to the storm clouds over the financial sector. In recent quarters, consumer finance companies have seen an uptick in write-offs and past-due accounts. In response, these companies have built up reserves for credit losses to cover potential future losses.
Earlier this year, consumer credit card debt surpassed $1 trillion for the first time, according to the Federal Reserve Bank of New York. Also, the second quarter's delinquency rates on credit card loans at the largest banks are now above pre-pandemic levels from 2019.
In the third quarter, American Express recorded a $1.2 billion provision for credit losses, up from $778 million last year. The net write-off rate on its card member loans and receivables also increased, up from 0.9% last year to 1.8% in the most recent quarter.
Amex's credit quality is the best in class
American Express operates the third-largest credit card network in the world, but what makes it stand out is its strong brand. The company offers high-end card products and has a brand that is frequently associated with luxury. This strong brand attracts a premium customer base that can better withstand economic downturns.
Card Member Loans and Card Member Receivables Credit Metrics. Source: American Express.
Compared to competitors, American Express's credit metrics are solid. Its net write-off rate on card member loans of 1.8% remained below the industry average rate of 2.6%. Additionally, Discover Financial Services, with its not-as-premium customer base, recently reported a charge-off rate of over 4% on its credit card loans.
Should investors buy the dip?
The recent re-steepening of the yield curve has market participants cautious about a possible recession. Consumer finance companies would be vulnerable to a potential economic slowdown, which could impact consumers' spending and ability to repay debts. If that were the case, American Express and its premium customer base are well-positioned to ride out such a scenario. Other consumer banks that cater to those less-than-premium customers would be more vulnerable in this case.
American Express is a solid stock with a strong brand, and its recent dip is worth buying. An economic slowdown would undoubtedly impact the business, but it's capable of riding out the storm (if it happens at all). And if the Federal Reserve achieves the coveted soft landing and keeps the economy out of a recession, then this dip is an excellent opportunity to get ahead of that moment.
