Inflation recently soared to 40-year highs, putting pressure on financial markets around the world. As a result, the Federal Reserve has resorted to aggressive monetary policy to combat rising prices. Combined with additional strain caused by Russia’s invasion of Ukraine, stocks have had a gloomy 2022 up to this point. And unfortunately, we probably won’t witness a rebound until investors are provided with a fuller picture of our economy’s health.
Business is great for American Express
American Express (AXP -1.07%) is a leading provider of personal, small-business, and corporate credit cards. The company generates much of its income through discount fees, where it earns a percentage on transactions with its partner merchants. Thus, as prices rise, transaction sizes also increase, contributing to higher fees.
Of course, it’s important to understand that inflation could halt consumer spending and increase credit defaults, which would offset any benefit that elevated fees would provide. That said, the company’s diverse and exclusive customer base makes it better equipped to weather an economic downturn than other credit card providers. For instance, its Amex Blue Card, which is its lowest-tier card, still requires a credit score of at least 670, which is considered good. Its Amex Black Card, which is the most prestigious card on the market, requires a credit score in the range of 800 to 850. This selectiveness has led Buffett to repeatedly praise the company for its unrivaled brand, framing it as an economic moat to ward off competition.
The company kicked off 2022 by posting a very strong first-quarter report. Total revenues surged 29.5% year over year, up to $11.7 billion, and diluted earnings per share finished at $2.74, beating Wall Street estimates by nearly 11%. Network volumes, which represent the total of billed businesses and processed volumes, climbed 30.1% to $350.3 billion, demonstrating strength on the consumer front. Likewise, net write-offs remained below 1% at 0.8%, indicating the company hasn’t experienced any notable deterioration in credit quality. This is markedly lower than the delinquency rate among all commercial banks in Q1 2022, which finished at 1.7%.
While it’ll be important to keep tabs on consumer spending and credit quality metrics moving forward, American Express have been cruising of late. For the full fiscal year, analysts project total revenue to grow 19.3% year over year to $50.6 billion and earnings per share to retreat 2% to $9.82. The credit card enterprise also appears remarkably cheap at current levels.
After pulling back almost 16% since the start of the year, the stock now trades at only 14 times earnings, well below its five-year mean price-to-earnings multiple around 20. Provided its highly profitable business, recent outperformance, and decaying valuation, American Express currently looks like a promising investment.
A sound investment right now
I like American Express as a play on high inflation today. While rising prices could also lead to weaker consumer spending and more credit defaults, this has not been the case thus far. I don’t think it’ll become a problem, either, which is part of the reason why Warren Buffett loves this stock. Its luxury-like brand and exclusive approval requirements have helped the company establish a wide economic moat over time. And to serve as a nice margin of safety, the stock currently trades at a bargain to its historical price-to-earnings multiple.
In an unsettled economic environment, American Express gifts investors an opportunity to invest in a sound business at a discounted price. That’s not something to easily pass up.