Should You Buy American Express While It's Below $315?

Globe and Mail

2 days ago

Key Points
American Express continues to report solid revenue growth, with younger consumers propelling the business forward.
A strong brand and a powerful network effect support American Express' competitive position.
The stock doesn't look cheap at the current price.
10 stocks we like better than American Express ›
American Express (NYSE: AXP) has been around for 175 years, which showcases the durability of its business model. It's not going to turn heads by posting outsized growth like a younger, more tech-driven company will. The credit card and financial services enterprise does have staying power, though.
This stock has put up a phenomenal gain in the past five years, producing a total return of 244%. While I don't believe this kind of performance will repeat through the rest of this decade, there's no question that American Express is a high-quality business that deserves a closer look.
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Should you buy the shares as they trade below $315 (as of July 25)?
Warren Buffett's stamp of approval
The great Warren Buffett has a stringent filter for what Berkshire Hathaway owns in its portfolio. So investors should take notice of the fact that American Express is one of the top holdings for the conglomerate. This means that the company must have some merits.
One area worth mentioning is the company's durable performance in these uncertain economic times. Through the first six months of 2025, Amex's revenue increased 8.4% year over year to $34.8 billion.
As mentioned, that growth isn't forcing investors to pick their jaws up off the floor. However, I do believe the gains are sustainable. American Express benefits from the general expansion in the overall economy, and from rising spending levels. The company can also "steal" market share from cash- and paper-based transactions -- the rise of digital payments helps Amex.
It wouldn't be surprising to see this level of growth continue indefinitely. Recently, Amex has been resonating with younger consumers. Attracting a younger demographic can lead to a lucrative long-term relationship, especially as these customers' financial lives evolve over time, their wealth grows, and they gain more spending power.
Leaning on key competitive advantages
American Express has built a reputation for being a premium brand in the credit card space. There's a certain level of exclusivity and prestige that comes with being a cardholder. That's supported by high annual fees for its top cards, like the Platinum and the Gold. This naturally brings in more affluent customers who have lower credit risk and the ability to spend more money.
The company also charges higher processing fees to merchants than competitors do. Even so, there are 100 million merchant locations that accept Amex payments, as they realize the benefit of having access to such a compelling customer base. In other words, you don't want to lose an Amex cardholder's business.
American Express has a unique setup because it also runs the underlying payment infrastructure, connecting merchants with customers. Consequently, there's a network effect in play here. It's a positive feedback look, with more merchants creating more value for cardholders and vice versa. This makes it extremely difficult for American Express to be disrupted or become obsolete.
Is the stock cheap or expensive?
The past five years have been spectacular for Amex shareholders. But after such a huge gain, investors must assess the current situation with fresh eyes. Is the stock cheap or expensive with the price below $315?
The price-to-earnings (P/E) ratio is a useful tool to analyze valuation. Right now, Amex's is 21.9, near its highest level in three years. I don't think the valuation presents a bargain opportunity. In fact, shares might be expensive.
Amex's management team forecasts mid-teens earnings-per-share growth over the long term. Assuming it's a 15% annualized gain, which seems realistic, the stock will double in five years. That's with the P/E multiple staying constant. But there's a good chance it will contract, a trend that would lower the stock's return.
Investors who are still bullish might want to consider a dollar-cost averaging approach. With this strategy, buying shares below $315 would have less of an effect in the long run.
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