Is American Express Stock a Buy?

American Express (AXP -0.34%) is the third-largest stock in Berkshire Hathaway‘s portfolio, with a fair value of $35 billion at the end of the second quarter. What makes it stand out for Chief Executive Officer Warren Buffett and his team is its substantial competitive advantages and robust economic moat.

But over the past several months, investor concerns have shifted toward slowing consumer spending and rising charge-offs and delinquencies in the banking sector. With American Express up about 60% since last November, is now a good time to buy the stock? Let’s dive into the business to find out.

American Express’s competitive advantages

One of the first things that stands out about American Express is its strong brand. The company has spent years carefully crafting its image to create an association with luxury and the finer things in life. In an interview with Bloomberg a couple of years ago, Buffett said, “You can’t create another American Express. I could create another shoe store, I could create another business publication, I could do all kinds of things with hundreds of billions of dollars, but I can’t put in the minds of people what is in their minds about American Express.”

American Express’s strong brand enables it to attract high-spending customers and turn them into customers for life. Its exclusive Black Card requires customers to spend $250,000 or more on their existing American Express cards and commands a massive $10,000 initial fee and a $5,000 annual fee. Its Platinum Card is more affordable, at $695 per year, and comes with benefits, including airport lounge access, hotel benefits, travel rewards, and credits for entertainment and dining.

American Express also benefits from strong network effects, with 144 million cards in circulation and 80 million merchant locations. Unlike Visa and Mastercard, it also holds on to its credit card loans, allowing it to collect net interest income in addition to processing and transaction fees.

Keep an eye on consumer spending and credit performance

American Express posted solid numbers in the second quarter, posting earnings per share of $3.49, which came in above analysts’ average estimate of $3.26.

It benefited from higher interest rates, with net interest income of $3.7 billion growing 20% year over year. However, this growth was modest compared to the first quarter’s, showing that the impact of higher interest rates is beginning to wane for it, as it has for many banks during the quarter.

Investors will want to monitor consumer credit performance. During the past several quarters, banks have seen their net charge-offs and delinquency rates on credit card loans tick higher. Some of this is due to normalizing credit conditions, but there is also some concern that consumer spending is showing signs of softening.

Image source: American Express.

During the quarter, American Express’s net write-off rate on its card member loans and receivables was 2.1%, similar to the first quarter. Its accounts 30 days or more past due fell from 1.4% to 1.3% quarter-over-quarter, which could indicate that the growing pace of charge-offs may be slowing. Chief Financial Officer Christophe Le Caillec told investors, “We expect our write-off rates to remain generally stable for the remainder of 2024.”

Another positive sign is that management raised its 2024 earnings-per-share forecast to $13.55 at the midpoint, up from its previous projection of $12.90.

Is American Express a buy today?

The stock has increased about 60% since November of last year, and at 17.6 times earnings and 5.7 times its tangible book value, its valuation is a little expensive compared to the past two decades.

AXP PE Ratio data by YCharts

You don’t necessarily need to rush to buy the stock today, although it isn’t prohibitively expensive to do so. You will want to continue monitoring the health of the U.S. consumer, as further softening and delinquencies could weigh on American Express in the near term.

Even so, rising charge-offs and delinquencies don’t hit American Express as hard as they might thanks to its high-spending, high-earning customer base, which is in a good position to withstand economic downturns. If the stock takes a dip from here, it could be an excellent buying opportunity for long-term investors.