Volatility has fueled the market for several months. The past week has been exceptional, with massive gains following the Federal Reserve’s latest interest rate decision on Wednesday, giving way to equally large losses on Thursday. At the weekend, the S&P500 was lower than where it started.
While this naturally instills fear in the investing community, it also gives us a chance to see which stocks outperform when times are tough. One stock that has beaten the market this year and is holding steady is American Express (AXP -3.67%)and this Warren Buffett favorite is trading at a very cheap valuation.
Invest in the future
American Express has fully recovered from the pandemic despite travel, one of its main categories, still under pressure. In the first quarter of 2022, revenue grew 29% year-over-year to $11.7 billion, with volume up 30%. And travel trends are beginning to reverse. Travel and entertainment spending was up 121% from a year ago, though still 12% below 2019 levels. It was most pronounced in spending by airlines, which increased by 245% compared to last year.
CEO Stephen Squeri attributed the company’s success to investments in “brand, customers, value propositions, coverage, technology and talent”. That’s a lot to juggle, but each one has helped redefine American Express’ position in its industry and lead to long-term success.
Much of that investment has focused on reaching beyond its traditional high-income cohort to win over small businesses and millennial shoppers. Spending hit a record high in March, driven by spending by Millennials and Gen Xers, which grew 56% year-over-year. Customers are more interested in digital and mobile options, as well as new cardholder benefits. And although the company’s main partners, such as Delta Airlines and Hilton Worldwide Holdingsremain an important strategic part of the benefits package, it adds more innovative partners to meet new demand, such as Vanguard’s financial advice.
Small business volume increased by 30% over last year, and small and medium-sized enterprises (SMEs) represent an increasingly large share of overall business activity. SMB business has fallen from 36% of billed business in 2019 to 38% this year.
Cardholder retention improved significantly and fees increased 14% year over year, representing 12% of total revenue. The year-over-year increase has accelerated in recent quarters, and acquisitions of new cards have also accelerated.
Looking ahead, management expects revenue growth of 18% to 20% year over year for the full year, above long-term growth for 2023, and 10% or more for 2024 and beyond. Earnings per share are expected to increase in the mid-teens. That’s double-digit long-term growth. This accounts for a recovered economy, and forecasting that long is not necessarily reliable. However, it also takes into account economic trends over American Express’ long history and how it has responded. Given the strengths and investments of the company and the evolution of economic trends in the past, investors can have a certain level of confidence in this projection.
Solid, safe and inexpensive
American Express stock has also outperformed the broader market over the long term, and you can see precisely in this chart how it lagged during the pandemic, but has now returned to its usual performance.
American Express shares are trading at a 12-month price-to-earnings (P/E) ratio below 17, compared to credit card processing giants Visa at age 32, and MasterCard at 36. To be fair, there’s more risk with the lending business of American Express, which Visa and Mastercard don’t, because they provide a network and work with the banks, which provide the loans. As its own closed-loop network, American Express has some similarities to bank stocks, which typically trade at much lower P/E ratios.
The future of American Express looks very bright, and the stock is trading at what seems like a very cheap price given that it expects double-digit growth over the long term. No wonder it’s a longtime Buffett holding. Individual investors should also consider this obvious stock for their portfolios.