American Express (NYSE: AXP) stock was doing pretty well until mid-October, when the company announced its third-quarter earnings of this year. Investors accustomed to strong quarterly results from other top companies in the financial sector fled AmEx, cutting the wings off the stock’s meteoric rise since the start of the year.
Like Warren Buffett, whose Berkshire Hathaway has owned a major stake in the company since 1964, I’m a longtime AmEx bull. Therefore, to me, post-earnings price declines are an anomaly and by no means a new normal for credit card giants. Here’s why:
To quickly summarize, AmEx’s net revenue for the period increased 8% year-over-year to $16.6 billion, and net income grew at a 2% pace to $2.51 billion.
The bottom line figure comfortably beat analysts’ consensus estimates. However, AmEx bravely ended up coming in just short of the average revenue estimate of nearly $16.7 billion. This earnings season, missing either headline metric is the exception rather than the rule in the big financial industry. For example, most large national banks beat both.
As AmEx watchers looked into the company’s quarterly details, they found another source of discomfort: its allowance for credit losses. This item, which details how much financial companies are setting aside for potentially bad loans, grew relatively quickly by 21% to $5.3 billion.
The combination of these two factors suggests to bears that AmEx’s wealthy “member” (the company’s fancy term for cardholders) base is holding back their spending. There is. To make matters worse, the credit card magnate expected delinquencies to increase significantly over future periods.
However, the problem is: Companies in the moneylending industry, including credit card issuers such as Amex, tend to be conservative in their financial practices. Lending funds is an inherently risky activity and must be done regardless of how well-off and wealthy the borrower is.
Zooming out for a top-down look at the macroeconomy, the Fed recently enacted a 50 basis point cut in the federal funds target rate, with another cut likely soon. Broadly speaking, lower interest rates mean more borrowing (including credit card usage). So it seems to me that Amex and other lenders are building up reserves as a hedge against sudden borrowing. After all, the company’s fate is tied to the fate of its loans.
And a very good lender. In contrast to Visa and Mastercard, which are pure processors, AmEx has deep and broad knowledge of its members as both a card issuer and a payment processor. Rewards programs, a model followed by other publishers, can be used to target members and encourage them to spend more.
story continues
Amex cardholders like to spend money, so they’re drawn to products like the unlimited, invite-only Centurion (or Black) card. For a veteran company that regularly records 11-digit sales per quarter, it’s not easy to increase that even further, but this company does it regularly. It regularly parlays into a strong net profit line, with its third-quarter profit margin of more than 15%.
Given such solid performance, ultimately who cares if the top line is a little below consensus? Amex runs a strong, sustainable business with a long growth runway ahead of it. Like our old friend Warren, I have been a bull to the company, am a bull now, and am confident that I will continue to be a bull for the foreseeable future. Amex stock continues to be a great addition to any portfolio, especially after the recent drop in prices.
Have you ever felt like you missed out on buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our team of expert analysts will issue a “Double Down” stock recommendation on a company we think is about to crash. If you’re already worried that you’re missing out on an investment opportunity, now is the best time to buy before it’s too late. And the numbers speak for themselves.
Amazon: If you invested $1,000 when it doubled in 2010, you would have earned $21,154. *
Apple: If you invested $1,000 when it doubled in 2008, you would have earned $43,777. *
Netflix: If you invested $1,000 when it doubled in 2004, you would have earned $406,992. *
We currently have “double down” alerts on three great companies, and we may not see an opportunity like this again anytime soon.
See 3 “Double Down” stocks »
*Stock Advisor will return as of October 21, 2024
American Express is an advertising partner of The Ascent, a Motley Fool. Eric Volkman has no position in any stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, MasterCard, and Visa. The Motley Fool recommends long January 2025 $370 calls on Mastercard and short January 2025 $380 call options on Mastercard. The Motley Fool has a disclosure policy.
Why You Should Buy Warren Buffett Stocks: Hand Over Fist was originally published by The Motley Fool.
