American Express (AXP +1.82%) reported first-quarter fiscal 2025 results on April 17. Despite tariff turmoil, the company reaffirmed its full-year revenue and earnings per share (EPS) guidance from January -- a sign of resilient spending across its customer base of consumers and businesses.
American Express has become a staple of Berkshire Hathaway's public equity portfolio. It's Berkshire's second-largest holding behind Apple, with Berkshire owning over 21% of American Express.
Here's why American Express remains a rock-solid Buffett stock to buy now.
Image source: Getty Images.
A well-oiled growth machine
In the recent quarter, earnings increased 9% year over year thanks to strong customer spending, retention, demand for premium products, and credit performance. American Express expects full-year revenue growth of 8% to 10% and EPS of $15.00 to $15.50, compared to 2024 EPS of $14.01.
American Express grew EPS by 25% last fiscal year, so it's impressive to see it build upon those excellent results despite what could be a more challenging macro environment.
NYSE: AXP
Key Data Points
American Express' consistency stems from its unique business model. The company collects revenue from four primary categories.
Discount Revenue refers to fees collected from merchants when American Express cards are swiped, tapped, or processed digitally. There's a fixed fee per transaction, plus a variable percentage fee based on the size of the transaction. American Express' Discount Revenue is similar to fees collected from pure-play payment processors such as Visa and Mastercard.
American Express earns interest income on credit card balances. Visa and Mastercard partner with banks to issue cards, with the banks bearing the risk of credit card balances while benefiting from interest income. In this vein, American Express acts as both a payment processor and a bank.
The third way American Express generates revenue is through card fees. American Express is known for its higher annual card fees, and generous benefits and perks that come from high spending.
Finally, American Express earns service fees and other revenue.
Here's what those results looked like in the most recent quarter compared to the same quarter last year, adjusted for changes in foreign exchange (FX) conversion rates.
|
Metric |
First-Quarter Fiscal 2025 |
First-Quarter Fiscal 2024 |
FX-Adjusted YoY Change |
|---|---|---|---|
|
Discount Revenue |
$8.74 billion |
$8.38 billion |
5% |
|
Net Card Fees |
$2.33 billion |
$1.97 billion |
20% |
|
Service Fees and Other Revenue |
$1.72 billion |
$1.68 billion |
5% |
|
Net Interest Income |
$4.17 billion |
$3.77 billion |
11% |
|
Revenues Net of Interest Expense |
$16.97 billion |
$15.8 billion |
8% |
Data source: American Express.
American Express' operating expenses relative to total revenue are extremely low. Rather, the primary costs are associated with card member rewards, marketing, and business development.
|
Metric |
First-Quarter Fiscal 2025 |
First-Quarter Fiscal 2024 |
FX-Adjusted YoY Change |
|---|---|---|---|
|
Card Member Rewards |
$4.38 billion |
$3.77 billion |
16% |
|
Business Development |
$1.53 billion |
$1.39 billion |
10% |
|
Card Member Services |
$1.33 billion |
$1.17 billion |
13% |
|
Marketing |
$1.49 billion |
$1.48 billion |
1% |
|
Operating Expenses |
$3.77 billion |
$3.57 billion |
5% |
|
Total Expenses |
$12.49 billion |
$11.39 billion |
10% |
Data source: American Express.
American Express pays significantly more in card member rewards than it collects in net card fees, which illustrates why the cards can be a good deal for members who maximize their perks and regularly pay off their balances. But expenses related to rewards are more than offset by merchant fees and interest income.
The American Express snowball effect
Looking at American Express' quarterly figures puts into perspective the effectiveness of its business model. The company attracts affluent customers with generous rewards that incentivize high spending on everyday expenses and travel. Spend enough, and the annual card fees look like a drop in the bucket compared to the monetary value of perks. American Express retains these customers by offering additional services, such as checking and high-yield savings accounts.
As the network grows, merchants are more willing to accept American Express cards so they don't miss out on sales, even though American Express fees to merchants are generally higher than those charged by Visa and Mastercard. American Express' international expansion gives customers more opportunities to use their cards.
American Express will incur more expenses on perks as card usage increases, but it will more than offset these costs through merchant fees. What results is a snowball effect, where total cardholders and card spending increase. American Express can then use its growing profits to accelerate stock repurchases and grow its dividend, thereby directly returning capital to shareholders.
Since American Express attracts high-quality cardholders, its credit metrics are consistently strong. In the recent quarter, the percentage of card member loans and receivables that were past due was just 1.3%, and net write-off rates were 2.1%. This means that the bank side of American Express continues to showcase impeccable risk management. Since net interest income accounts for roughly a quarter of total revenue (and single-handedly exceeds operating expenses), it's paramount that American Express ensures its customers can afford to pay off their credit balances and loans.
The sell-off in American Express is a buying opportunity
American Express stock is down 15.3% year to date at the time of this writing, compared to a 10.2% decline in the S&P 500. The underperformance is likely because investors are concerned with tariff tensions and recession fears that could slow down consumer spending. But the company's results and guidance indicate American Express remains confident that it can build upon record results in fiscal 2024 with modest growth this fiscal year.
American Express is an excellent value, with a mere 17.6 price-to-earnings (P/E) ratio and a 16.4 forward P/E, compared to a 10-year median P/E of 16.8. The stock yields a modest 1.3%, but American Express spends significantly more on buybacks than dividends, which has helped it grow EPS far faster than net income to keep the valuation down.
American Express checks all the boxes as a stock that investors can buy confidently, even if the market continues to sell off.
