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Is American Express Stock Worth the Splurge?

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The S&P 500 is racing ahead, with one stock shimmering alongside it – American Express (NYSE: AXP). Emerging from the depths it plummeted last October, the financial powerhouse has soared an impressive 62%, now sitting smug at a premium valuation.

Let’s dive into the key factors to consider if you’re mulling over an American Express investment today.

The Opulent Allure of American Express

Per WalletHub, American Express snugly holds a 19.6% slice of the credit card market purchase volume, securing its seat as the third-largest payment network in the U.S., only trailing Visa (52.6% share) and Mastercard (23.7% share).

American Express stands out with its posh reputation among consumers. Through years of tireless branding efforts, the company has cemented itself as a luxury symbol. The invite-only Centurion Card, dubbed The Black Card, demands a jaw-dropping annual spend ranging from $500,000 to $1 million. On the other hand, The Platinum Card boasts a hefty $695 annual fee, catering to high-spend individuals with a taste for luxury. Both cards shower select customers with exclusive perks and rewards from elite travel providers, luxurious hotels, high-end airlines, and upscale fashion brands.

American Express’ enviable branding and position have made it a staple in Berkshire Hathawayβ€˜s investment repertoire. In a Bloomberg interview, Berkshire CEO, Warren Buffett, mused, β€œI can’t decipher what consumers have in mind regarding American Express.”

Person at restaurant table making a card payment.

Image source: Getty Images.

Investor Caution: Recognizing the Risks

American Express locks horns with Visa and Mastercard, but don’t let valuations cloud your judgment. Presently, American Express commands a price tag of 20 times earnings, while Visa and Mastercard boast 32 and 41, respectively.

Contrary to appearances, American Express isn’t exactly a bargain. Its business model diverges slightly from its counterparts. While Visa and Mastercard solely process payments, American Express also holds onto credit card loans. This hefty responsibility lowers American Express’ valuation, aligning it more closely with a bank.

Hence, American Express investors must keep a close watch on the company’s credit metrics. In times of robust consumer spending and a healthy economy, credit metrics pose little concern. Yet, the current climate warrants a more cautious approach.

With consumer credit card debt towering at $1.13 trillion, showing a 32% surge over the past two years, caution signs are starting to flicker. The Federal Reserve reports a credit card loan delinquency rate of 3.2% in commercial banks, marking the highest quarterly level since 2011.

US Credit Card Debt Chart

US Credit Card Debt data by YCharts

To Buy, Sell, or Hold American Express Stock?

American Express stands at the edge, vulnerable to economic downturns that could trigger a rise in delinquencies. However, its customer base typically boasts superior credit scores compared to its competitors, rendering them more resilient during economic storms. In the last quarter, American Express wrote off a mere 2% of its credit card loans, a figure below pre-pandemic levels.

Despite the perils of escalating delinquencies, American Express now prances at a premium to its recent past, following an impressive stock surge. Presently, the company carries a price tag of 20.2 times earnings and 2.8 times sales, soaring above its 10-year averages.

AXP PE Ratio Chart

AXP PE Ratio data by YCharts

The American consumer exudes vigor, yet whispers of fragility are surfacing. Bank of America CEO, Brian Moynihan, renowned for his precise consumer strength predictions, remarked, β€œAt some point, that consumer will slow down, and they have slowed down their spending,” highlighting a fall from 10% spending growth last year to a recent 3% to 4%.

American Express, a formidable company flaunting a robust brand, undoubtedly merits a spot in investors’ portfolios. Nonetheless, the stock lacks the bargain appeal it held a few moons ago. A possible deceleration in consumer spending or a spike in delinquencies could cast a shadow on the company’s earnings in the upcoming quarters. Following its recent 62% leap, I advocate holding American Express today.

Considering investing $1,000 in American Express right now?

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen holds no position in any mentioned stocks. The Motley Fool holds positions in and recommends Bank of America, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool advocates for the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool follows a strict disclosure policy.

The views and opinions expressed here belong to the author and may not necessarily align with those of Nasdaq, Inc.

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