American Express (AXP +0.16%) is undoubtedly the leader in the premium segment of the credit card market. It has registered durable growth, with net revenue rising at a compound annual rate of 8.8% in the past 10 years. The top line was lifted by billed business, the amount of payment volume the company handles, growing at a 5.4% yearly clip.
The market cares what American Express' performance will look like in the future. Is this financial stock built for the next decade of spending? Investors will struggle to find reasons to be bearish on this business.
Image source: The Motley Fool.
Keep swiping those American Express cards
The current economic climate is doing everything but instilling confidence in consumers and investors. Higher energy prices are pushing inflation to three-year highs. Housing turnover is low as mortgage rates remain elevated. And there are concerns about how the labor market will evolve as artificial intelligence progresses.
These headwinds are no match for American Express. During the first quarter, the company's billed business climbed 10%, the fastest pace in three years.
Serving an affluent customer base benefits the company, as these consumers are not as sensitive to the broader macro environment. American Express' Platinum Card, which carries a hefty $895 annual fee, saw an acceleration in spending growth in the first quarter. The retention rate is also impressive.
At a high level, American Express' success is tied to economic growth generally and greater spending specifically. In 10 years, it's a virtual certainty that global GDP and payment volumes will be meaningfully higher than they are today. That presents a favorable tailwind for this business as it captures that activity.
Average spend per card member increased by 62% between Q1 2016 and the most recent quarter. While I suspect growth might slow in the future as American Express further penetrates key markets and reaches maturity, the positive trend should continue. The leadership team is excited about how popular the cards are with millennial and Gen Z consumers, who should have extended lifetime values.
NYSE: AXP
Key Data Points
Shares trade at a fair valuation
Over the past 10 years, the credit card stock has produced a total return of 556% (as of June 25), which handily outperforms the S&P 500 index's total return. Given management's goal of mid-teens long-term annualized earnings-per-share growth, coupled with durable competitive strengths coming from the brand name and network effect, this is a business investors should zero in on.
The current price-to-earnings ratio of 21.4 looks like a fair entry point to own a high-quality company that is in position to continue beating the market in the long run.
