American Express (AXP +1.09%) put together a fantastic performance for investors in 2024. Shares of the credit card company soared 59% last year, substantially outperforming the broader S&P 500.
This top financial stock is trading near record territory. The market is enthused by strong business momentum on a fundamental basis, as American Express is putting up solid results. So, is now a good time to buy the shares?
Driving growth
American Express is a unique operation in the financial services sector because not only does it issue cards to borrowers and extend them credit, but it also runs a payments network and a banking entity that provides savings products and loans. This diversifies revenue streams somewhat, and it gives the business multiple growth engines.
During the nine-month period ended Sept. 30, Amex posted 8% year-over-year revenue growth. That's a healthy clip that was boosted by gains across the board. Discount revenue (the money the business receives from merchants), net card fees, and net interest income all showed strength. These are the three largest moneymakers for American Express.
Looking ahead, management had forecast revenue growth of 9% for 2024. And Wall Street analysts on average expect 8% gains in 2025 and 2026. I believe it's reasonable to expect high-single-digit annual sales increases after that. That's because Amex benefits from the decline of cash transactions and the overall increase in spending across the economy, two long-term trends.
NYSE: AXP
Key Data Points
Competitive strengths
American Express has been in business for more than 150 years, and during that time it has developed some powerful competitive strengths. This is precisely what makes up its economic moat, a key trait I'm sure Warren Buffett-led Berkshire Hathaway, which owns 21.5% of Amex, certainly appreciates.
In the credit card industry, perhaps no brand is as influential as American Express. The company positions itself as a premium offering with some of its top credit cards commanding high annual fees and offering superior perks and rewards. This naturally attracts a more affluent customer base.
The result for Amex is greater spending on its platform over time. What's more, these customers reduce default risk. It helps explain why delinquency rates are typically lower for American Express compared to industry peers.
Another core strength protecting the business's competitive position is the presence of network effects. As previously mentioned, Amex operates the underlying communications protocol that connects its 145 million cardholders with more than 80 million merchant locations that accept its cards. The current size of the network creates tremendous value for both sets of stakeholders, increasing utility. That only becomes truer as it grows over time.
Elevated valuation
Shares of Amex have soared 145% during the past five years, trouncing the S&P 500 index's 81% gain during the same period.
But although the shares trade in record territory, it's important to be mindful of the valuation. The shares now carry a 12-month trailing price-to-earnings (P/E) ratio of 22.3. That figure represents a premium to the trailing one-year, three-year, five-year, and 10-year average P/E multiples. To say the stock isn't cheap right now would undoubtedly be an accurate statement.
On the one hand, it's easy to hesitate when looking at this valuation. Amex could be benefiting from bullish fever as the market prices in the prospect of lower interest rates to boost economic growth and consumer spending. Maybe the enthusiasm will fade sometime soon.
But on the other hand, it's hard to deny that American Express is a top-notch enterprise. It registers steady growth, has a strong brand and network effects, and is a core Buffett holding. I believe the business should be on your radar. Maybe dollar-cost averaging into the stock over several months is the right move to gain exposure.
