Is it too late to buy American Express stock?

Actions of American Express (AXP 0.01%) have soared to an all-time high, with a return of 44% this year, beating the 20% gain of S&P 500 index. The financial services giant benefited from resilient macroeconomic conditions, driving solid growth and stronger earnings. Shareholders have had a lot to cheer about lately.

On the other hand, investors on the sidelines might wonder if it’s too late to jump in and buy stocks. Can the rally in American Express stock continue?

Industry leading foundations

American Express is recognized as operating the fourth largest payment network in the world, based on transaction volume. The company stands out from peers such as Visa and MasterCard in its vertically integrated business model. American Express has found success beyond its subscription-based network by directly issuing credit and debit cards into a broader financial platform that includes lending options, insurance, merchant solutions and travel services.

The strategy of focusing on the premium consumer space while catering to business and corporate customers has proven extremely profitable, and the latest numbers tell the story. In the second quarter, American Express posted a 9% increase in exchange-adjusted revenue, with a 21% increase in adjusted earnings per share (EPS).

What caused the stock price to skyrocket this year? The big surprise was the company’s ability to manage a deceleration of top-line growth from the double-digit pace of recent years while generating record profitability. This was achieved by moving towards more card fees while controlling operating expenses.

A backdrop of stronger-than-expected global economic growth, together with high interest rates, resulted in a 20% increase in net interest income compared to Q2 2023, even as card delinquency remained stable and below pre-pandemic levels. Similarly, net card fees increased by 15%, capturing the continued expansion of the member network and the issuance of new cards.

The trends were good enough to boost management’s confidence in future prospects. American Express sees full-year earnings between 9% and 11%, with an EPS target of $13.30 to $13.85. This has been revised significantly higher compared to the previous estimate of $12.90.

Image source: Getty Images.

Room to stay bullish on American Express

There is much to like about American Express as a blue chip industry leader with several operational and financial headwinds. A major market development was the Federal Reserve’s move to cut interest rates in September for the first time since 2020. The policy change, which recognizes the favorable trend in decelerating inflation, provides relief for businesses and consumers seeking credit.

For American Express, a less restrictive monetary policy, along with the potential for further Fed rate cuts, should lead to a rebound in loan demand and the company’s lending services. In this environment, the bullish case for the stock is that key metrics, including total network transaction volumes and billed card services, are capturing a boost in activity that may exceed expectations.

In terms of valuation, American Express shares are trading at about 20 times management’s full-year EPS guidance. There’s a case to be made that this level remains a bargain next to payments industry peers like Visa and Mastercard, which trade at P/Es of 29 and 35, respectively.

In particular, American Express’ international card services outside the United States currently contribute about 20 percent of its global payments business, but have seen revenue accelerate in recent quarters. The opportunity for American Express to expand globally and consolidate market share adds a layer of diversification that could support an expansion in the company’s valuation multiple over time. This could be a long-term catalyst for the stock.

AXP PE Ratio data (before) by YCharts.

The big picture for investors

I think American Express stock deserves a place in investors’ portfolios and is well-positioned to continue rewarding shareholders. It probably won’t be a straight line higher from here, but I expect more growth in the stock through 2025 and beyond. For investors with a long-term view, one strategy to consider is dollar cost averaging to build a stock position as a method to minimize time risk.