Investors will have no problem finding quality in this company. Warren Buffettbuilding on its impressive track record over the past few decades, is a source of inspiration when it comes to investment ideas. By reviewing the extensive portfolio of Berkshire Hathawaythere are some dominant companies.
The third largest share is American Express (AXP). The conglomerate owns almost 21% of the outstanding shares of this prominent financial company. But before you rush to follow the steps of the Oracle of Omaha and buy the stock, here are three things to know.
Operating in a closed system:
American Express, similar to Visa and Mastercard, operates payment networks that connect consumers and merchants to facilitate commerce. However, unlike Visa and Mastercard, American Express acts as credit card issuer and payment network, operating a closed loop payment system. This involves approving and underwriting borrowers, adding default risk, but also allowing the company to retain most of the revenue from transactions.
During the third quarter of 2023, American Express generated $8.4 billion in discount revenue and posted $3.4 billion in net interest incomethese being the main revenue drivers.
Benefiting from key competitive advantages
With almost two centuries of history, American Express has developed competitive advantages that make up its economic pillar. The globally recognized brand targets an affluent demographic, which attracts merchants due to the higher income and purchasing power of consumers. Additionally, the company benefits from network effects with 138 million cards in circulation and millions of merchants accepting AmEx, becoming more valuable as the network grows.
Reasonable valuation
Over the past five years, American Express stock has returned 82%, matching the S&P 500. Over 30 years, the stock has risen nearly 2,200%, far outperforming the index. With a price-to-earnings ratio of approximately 17.3 and in line with the 10-year moving average, the valuation appears reasonable. Despite macroeconomic challenges, the company continues to show strong growth, with revenue up 13% and diluted earnings per share up 34% in the most recent quarter. By 2024, both figures are expected to increase by double-digit percentages, provided there is no economic deterioration.
In short, given the above considerations and American Express’s growth potential, the current valuation seems completely reasonable, putting the stock on your radar.
Should you invest in American Express right now?
Before you buy American Express stock, keep in mind that the Motley Fool Stock Advisor analyst team recently identified the 10 Best Stocks for Investors to Buy Right Nowand American Express was not one of them.
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Source: Ambito
I am a 24-year-old writer and journalist who has been working in the news industry for the past two years. I write primarily about market news, so if you’re looking for insights into what’s going on in the stock market or economic indicators, you’ve come to the right place. I also dabble in writing articles on lifestyle trends and pop culture news.
