Representing 14.7% of the $319 billion portfolio, American Express (AXP 1.39%) is Berkshire Hathaway's second-biggest position. It's not far behind Apple, which is the top holding.
This financial stock has produced a total return of 163% in the past five years (as of Feb. 27), but it trades 20% off its peak. Don't rush to buy just yet. Here are three things you need to know about American Express.
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Running a spend-centric business model
Typical credit card issuers like when their customers hold revolving balances, as this generates interest income. While American Express also makes money the same way, its business model is unique in that it benefits tremendously from greater spending activity in what's known as a spend-centric system.
Besides issuing the credit cards, American Express also operates the underlying payments infrastructure that connects consumers and merchants. Anytime its credit cards are used in a transaction, the company collects discount revenue from merchants, which totaled $9.9 billion in Q4.
Add this to high annual fees, and this is a lucrative business. That's particularly true when you consider that American Express targets a more affluent demographic that has above-normal buying power.
Is it time to panic?
On Feb. 27, Amex shares dipped 8%. The market appears to be worried about fintech company Block cutting about 40% of its workforce due to artificial intelligence (AI)-related efficiency gains. Founder and CEO Jack Dorsey talked about how its customer base of sellers and customers is "going to feel the economic effects of this same shift."
If there are mass layoffs across the economy, could this mean that spending activity is doomed?
While this is certainly something investors should keep in mind, I don't believe there's any reason to panic just yet. For what it's worth, weakness in consumer spending will have ripple effects throughout the entire economy, impacting not just a credit card and payments enterprise, but businesses in any sector.
NYSE: AXP
Key Data Points
A better entry point
With this stock now trading 20% below its record, investors who have been on the sidelines are looking at a much more compelling opportunity.
The leadership team believes that diluted earnings per share will be between $17.30 and $17.90 in 2026. Based on the midpoint of this forecast and the stock price of $308.90, American Express shares trade at a forward price-to-earnings ratio of 17.6. That's not a bargain price, but it's also not ridiculously overvalued.
Should the business continue to see its bottom line expand at a double-digit annualized clip in the years ahead, investors will benefit.
