After an extraordinary 65-year tenure leading Berkshire Hathaway, CEO Warren Buffett has announced his decision to step down. Under Buffett’s visionary leadership, Berkshire has achieved remarkable returns for investors, establishing itself as a vital source of innovative investment strategies. The investment principles espoused by Buffett, alongside the philosophies of his esteemed partner, the late Charlie Munger, have been instrumental in facilitating Berkshire’s impressive 20% compound annual returns since 1965, illustrating the effectiveness of their long-term investment approach.
Among the crown jewels in Berkshire’s extensive public stock portfolio is American Express (AXP 0.32%). This renowned credit card brand is synonymous with luxury and exclusivity, making it a preferred choice among discerning consumers. In light of recent market volatility, American Express is currently trading 15% below its 52-week high, presenting an enticing buying opportunity for investors looking to capitalize on its potential for growth.
Understanding the Competitive Edge of American Express
In the vast payments landscape, American Express stands as a smaller player amidst industry giants such as Visa and Mastercard. To provide context, in 2023, American Express processed an impressive $1.7 trillion in credit card purchase volume, securing a 9% share of the global purchase volume. This total is significantly overshadowed by its competitors; Visa generated a staggering $6.3 trillion (representing a 33% market share), while Mastercard closely followed with $4 trillion (21% market share).
What sets American Express apart is its unique business model. Unlike Visa and Mastercard, which collaborate with banks to issue cards and manage credit risks, American Express undertakes both roles independently. It operates a closed-loop payment system that allows it to manage transaction processes while also overseeing the credit it extends to customers. This dual function facilitates a direct and meaningful relationship with its users, enhancing customer loyalty and trust.
Despite its relative size, American Express has strategically positioned itself to cater to affluent consumers. Since the introduction of its inaugural charge card in 1958, the company has focused on attracting high-spending clients who typically exhibit lower default rates. This targeted approach not only generates a reliable revenue stream but also enhances the company’s resilience during economic downturns, ensuring stability even in challenging times.
Warren Buffett has consistently emphasized that American Express’ brand is among its most significant competitive advantages. When Stephen Squeri assumed the role of CEO in 2018, Buffett conveyed to him the essential nature of the brand, stating, “the most important thing about American Express is the brand and the customers that aspire to be associated with the brand.” This highlights the value of brand reputation in driving consumer preference and loyalty.
Monitoring American Express’ Business Prospects Amidst Competition
American Express operates in an intensely competitive environment, where the consumer-lending segment is particularly susceptible to economic fluctuations, categorizing it as a cyclical stock. Given current uncertainties related to tariffs, rising costs of consumer goods may adversely impact consumer spending habits. Should the economy experience a slowdown or if consumer spending declines significantly, American Express could witness a reduction in transaction volumes, which would likely result in lower earnings.
Additionally, it is crucial to consider that American Express extends loans to consumers. An increasing number of defaults on these loans could compel the company to bolster its reserves to mitigate potential losses. This reliance on consumer lending is a contributing factor to American Express’ lower price-to-earnings (P/E) ratio compared to its rivals, Visa and Mastercard, reflecting market perceptions of risk associated with its lending practices.
Image source: Getty Images.
In the first quarter, American Express reported a network volume of $439.6 billion, reflecting a 5% increase compared to the previous year. Furthermore, as interest rates have risen over recent years, American Express has capitalized on its consumer loans, resulting in an 11% increase in net interest income, which reached $4.2 billion during the same period. This financial performance underscores the company’s ability to adapt to changing economic conditions.
Moreover, the company’s credit quality has exhibited remarkable stability. By the end of Q1, only 1.3% of its card loans and receivables were overdue by more than 30 days, and the net write-offs stood at 2.4%. Both of these metrics have remained consistent over the past year, indicating that consumers continue to manage their credit obligations effectively, which is crucial for the company’s long-term stability and growth.
Why American Express is an Ideal Long-Term Investment for Savvy Investors
American Express has established itself as a formidable player in the financial sector, showcasing a robust brand alongside impressive performance metrics. The recent decline in stock prices has opened up a valuable opportunity for investors. The stock’s P/E ratio decreased from 23.2 to 19.3, prompting savvy investors to consider this moment as an ideal time to add shares to their portfolios.
Renowned investor Warren Buffett has consistently expressed his confidence in American Express, making it a compelling stock for investors to consider acquiring shares today. If market conditions dip further later this year amid prevailing uncertainties, investors should be primed to seize the opportunity to buy more shares of this exceptional blue-chip stock, which has a history of delivering value over the long term.
American Express is an advertising partner of Motley Fool Money. Courtney Carlsen has positions in American Express and Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool has a disclosure policy.
