Despite the big sell-off, American Express stands ready to boom in the bear market

  • American Express sales fell to a 52-week low
  • Amex shares are down 11.7% year-to-date and 29.3% below the record high
  • AXP is a good value stock for the long-term investor amid the ongoing turmoil
  • If you are interested in upgrading your search for new investment ideas, check out InvestingPro +

Credit card giant American Express (NYSE:) has been in deep turmoil over the past several months as concerns about plans for aggressive rate hikes by the Federal Reserve led to a massive sell-off of shares of several top-rated companies.

After hitting a record high of $199.55 on February 16, AXP stock quickly fell to $136.49 on June 16, its weakest level since February 2021. The stock is now down 11.7% year-to-date.

Since then, Amex shares have posted a modest recovery, closing at $141.65 on Thursday, but still standing nearly 29% below their all-time high.

At current levels, the New York City-based payment processing company — one of the 30 components — has a market capitalization of $106.1 billion.

We believe that the massive sell-off in AXP has created an excellent opportunity to buy the stock, thanks to a large number of catalysts and positive developments.

Amex as a hedge against inflation, Fed rate hike

With its wide range of financial services, American Express will benefit directly from the inflationary environment. That’s because the credit card company earns a fee as a percentage of payment volume transactions.

As the cost of goods and services increases, transaction volume will also rise, resulting in higher American Express fees.

Additionally, since most credit cards have a variable rate, there is a direct correlation to the Fed standard. As the Fed funds rate goes up, the base interest rate goes up as well, causing credit card rates to go up.

Unlike Visa (NYSE:) and Mastercard (NYSE:), American Express is a card issuer and card processor, which allows it to keep a larger portion of the fees from the transactions it processes.

Amex is the largest credit card issuer and the third largest credit card network in the United States. As of December 31, 2019, the company had 114.4 million cards in effect, including 54.7 million in the United States.

Warren Buffett loves stocks

American Express is currently one of the largest stock holdings in Berkshire Hathaway (NYSE:), along with names like Apple (NASDAQ :), Bank of America (NYSE:), Coca-Cola (NYSE:), and Wells Fargo (NYSE:). .

The Warren Buffett-owned company now owns 151.6 million shares in AXP, or 20% of all outstanding shares. The company’s investment stake is approximately $24 billion, making AXP the fifth largest.

In fact, American Express accounts for approximately 8% of Berkshire’s entire stock portfolio.

Berkshire also owns shares in competitors Amex Visa and Mastercard, although the positions are much smaller.

At a P/E ratio of just 14.4, American Express stock is a relative bargain compared to V and MA, which trade at around 36.5 and 32.9 times earnings, respectively.

Amex stock is also trading at a deferred P/E ratio agreed at just under 12.8 in the market.

With an ample amount of cash on hand and relatively low debt, AXP shares currently offer quarterly payments of $0.52 per share, which means an annual dividend of $2.08 with a 1.44% return.

Analysts remain optimistic

Many analysts remain generally optimistic about AXP, citing its strong long-term outlook. in Investing.com A survey of 25 analysts, 11 of whom rated AXP stock as “buy”; 12 rated it a “hold”, and only one considered it a “sale.”

Among those surveyed, the stock had a roughly 37% upside potential with a 12-month average price target of $193.41.

AXP Consensus Estimates

Source: Investing.com

Similarly, according to many valuation models, including multiples of price-to-earnings or terminal values, the average fair value of an American Express stock at InvestingPro It stands at $192.07, which is a potential 36% higher than the current market capitalization.

AXP's fair value

Source: InvestingPro

AmEx Q2 Earnings Coming

American Express, which outperformed in the first quarter and reaffirmed its guidance for 2022 despite a challenging macroeconomic environment, is set to announce its latest financial results before the US market opens on Wednesday, July 20.

Consensus estimates are for the credit card company to post earnings per share of $2.41 for the second quarter, down 13.9% from earnings per share of $2.80 in the same period last year.

Revenue is expected to rise 21.1% year-over-year to a record $12.4 billion, reflecting a strong combination of increased spending volumes and increased transactions.

In addition to the bottom line numbers, investors will be watching the performance of AmEx’s vital travel and leisure business to see if it can keep up with its blazing pace of growth as travel levels return to pre-pandemic levels.

Spending on goods and services, which grew 21% year-over-year in the previous quarter, will also be in focus.

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If that’s good enough for Warren Buffett, it’s good enough for you.

Between an attractive valuation, a dependably profitable business model, and massive cash backlog, the American Express stock appears to be a solid bet on the current bear market environment.

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