Should You Buy American Express While It’s Under $300?

American Express (AXP -0.36%) was on the wave this year. The stock is up almost 60% without much stress. The stock has only fallen 10% or more once since last fall. It looks like it’s only a matter of time before the stock hits $300.

However, there are some potential pitfalls. Personal savings rates among US consumers are at ten-year lows, and America’s total credit card debt is at an all-time high. In other words, people are financially drained.

Should investors follow the momentum and buy shares today? Or is American Express in for a letdown?

What recession?

Various consumer-facing companies cited weaker spending in their midyear earnings, but American Express isn’t feeling the pain. The company reported solid fundamentals in its second quarter report. Net income rose 8% year-over-year in Q2, driven by a 6% increase in billed business.

Growth has slowed since the years following COVID-19, which makes perfect sense. The stimulus money that fueled the economy (and inflation) has dried up. However, I would argue that 8% revenue growth is satisfactory at a time when people are pushing for higher prices in places like McDonald’s.

Image source: American Express.

Perhaps more important than people spending money is that American Express customers pay their bills. As you can see above, late payments and defaults are below pre-pandemic levels.

This is important to track ahead. For now, it appears that the economic pressure is not affecting American Express. Its credit card is generally seen as a premium brand, so it may perform better than typical lenders in a recession scenario.

Solid growth ahead

American Express and its shareholders could enjoy solid growth over the next few years if spending remains resilient. The consensus among analysts is that the company will grow revenue between 8% and 9% annually from this year through 2026.

The company also raised its full-year earnings per share (EPS) guidance in Q2 from a range of $12.65 to $13.15 to a range of $13.30 to $13.80. This represents an increase of 23% year-on-year. Analysts estimate that the company will grow revenue by an average of 15% annually over the next three to five years.

Given the whispers of a looming recession, the economy could still drag down American Express. However, management noted in the company’s second-quarter earnings report that the core business is comfortably supporting 15 percent earnings growth, even in what management described as a slower growth environment. All bets are off on a severe economic downturn, but it signals confidence in American Express’ business momentum.

Should investors buy the stock?

American Express stock looks reasonably priced, even after the stock’s 60% run. Shares trade at 18 times updated management earnings guidance, on par with American Express’s average price-to-earnings ratio over the past decade.

The stock pays a dividend yield of 1.1%, so the stock could produce annualized total returns of around 16% over the next few years if it meets expectations and maintains its current valuation. Suppose the US enters a mild recession. Halving earnings growth rates from an estimated 15% would give the stock a shot at single-digit annualized investment returns.

That makes American Express a solid position today, even as it trades at $300 a share. Investors can still make money in the stock if they’re willing to own what should be several years of double-digit earnings growth.

Again, this all changes if there is an economic crisis. A severe recession could destroy American Express’s earnings growth and hurt the stock. However, predicting events like 2008-2009 or 2020 is virtually impossible. Lending is part of American Express’ business model, so you’ll never avoid this risk entirely. Use portfolio diversification to protect your portfolio from the risk of investing in lenders like American Express.

Regardless of how the economy plays out in the short term, American Express has been around since the mid-1800s and will likely be around for many years to come.