Should You Buy American Express While It’s Under $250?

Known for its premium credit card offers, American Express (AXP 1.85%) is a powerhouse in the financial services sector. And if you doubt that this is a quality enterprise, it’s worth noting that, led by Warren Buffett Berkshire Hathaway is a major investor, owning over 21% of the business.

American Express has been hit for the past few days. Investors should buy this financial stock while trading well below $250 per share?

Strong financial performance

The company’s stellar performance is extremely encouraging. During the three-month period ended June 30, American Express reported revenue (net of interest expense) of $16.3 billion, up 8% year over year. This was driven by higher payment volume and 3.3 million new active cards. In addition, Amex is seeing strong cross-border payments activity.

This is a very profitable business. Over the past five years, the company’s net profit margin has averaged 14.4%. Amex’s adjusted diluted earnings per share (EPS) of $3.49 increased 21% compared to Q2 2023. share buybacks is a key part of management’s capital allocation plan that benefits investors.

The recent financial success is impressive because it is happening during an uncertain economic time. Inflationary pressures continue to weigh on consumers. And there are still fears out there about a recession. But Amex is on a roll. Management even raised EPS guidance for 2024, revealing their near-term confidence.

Discounting, the company’s long-term earnings are also noteworthy. Revenue and Adjusted Diluted EPS in Q2 2024 were 51% and 69% higher, respectively, than the same period in 2019. Amex has been and continues to be a compounding machine.

Wide economic moat

In addition to strong financial performance, I’m sure Buffett appreciates Amex’s economic moat. I believe the brand is a key asset that differentiates this company’s offerings in the competitive financial services industry. And that position isn’t likely to change anytime soon.

Because of its top benefits and rewards, Amex offers premium credit cards that do a good job of attracting affluent customers who have more spending power than the average person. This leads to higher income potential for the business. Lately, American Express has brought in many younger cardholders, a positive trend because these people can be lifelong customers whose spending grows over time.

That Visa and MasterCardAmex has its own payment platform. Consequently, the business benefits from strong network effects. On the one hand, they are cardholders. And on the other side, there are merchants. As the number of card members grows, the Amex network becomes more valuable to merchants. As the number of merchants accepting Amex increases, cardholders are finding more utility. It’s a virtuous cycle that makes the business better over time.

Good time to buy

Since hitting an all-time high of $253.04 on July 31, Amex shares are currently down about 11% (as of August 5). This gives potential investors a rare opportunity to buy into a fantastic company in decline.

The stock currently has a price-to-earnings (P/E) ratio of 16.9. This is a reduction from the 10-year average of 17.9, which is advantageous. Moreover, Amex shares are cheaper than S&P 500P/E multiple of 23.8. I believe this is a good time to consider adding the business to your portfolio.

With Amex shares trading at a current price of $225.92, well below $250, the stock looks like a smart buy-and-hold candidate. Patient investors are poised to see solid returns over the next few years.