The Oracle of Omaha has long been a fan of this business.
Berkshire Hathaway owns dozens of businesses in its public equities portfolio. However, there is extreme concentration among a handful of names at the top. The average investor is wise to look at these companies as a potential source of ideas.
There’s one top financial stock that has generated a total return of 102% in the past five years, and the Oracle of Omaha’s conglomerate owns a sizable 21% stake in it. The momentum has continued recently, as shares have outperformed the S&P 500 by a wide margin in 2024.
Should you buy this business right now?
Reporting solid results
Buffett has long been a shareholder in American Express (AXP), and it should be a company on your radar. One reason is the credit card and payment giant’s strong financial performance — and that has been the case even this year.
During the latest three-month period, American Express saw billed business, which represents transaction dollar volume, rise 6% year over year. The fastest growth came from international card services. This helped drive a revenue gain of 8%. Add this to net income, which soared 39% in the quarter, and you can understand why the shares have done well this year.
Standing out in the industry
Based on some of Berkshire’s top holdings, you can easily figure out that Buffett is a fan of businesses that possess powerful brands. Amex fits squarely in this category. The company positions its credit cards as premium offerings with valuable perks and rewards, which helps to bring on affluent customers who want to be associated with the Amex experience.
Moreover, these same cardholders benefit the business from a financial perspective. They are able to pay the high annual fees that Amex charges. In fact, the company reported 15% year-over-year growth in net card fees, marking the 24th straight quarter of having a double-digit gain. Because customers are in better financial shape than the typical customers at other banks, the business has lower default rates than competitors.
The brand is now attracting a younger group of customers. “Millennial and Gen Z customers grew their spending 13% and continued to drive our highest billed business within this segment,” CFO Christophe Le Caillec highlighted on the Q2 2024 earnings call. “These younger card members continue to demonstrate strong engagement, and we see that they transact over 25% more, on average, than our older customers.”
Besides the strong brand, American Express also benefits from having network effects. Essentially, this discourages new entrants from launching credit cards that directly compete with Amex because they not only don’t have the 80 million merchant acceptance locations that Amex does, but without a meaningful cardholder base, it would be extremely difficult to bring on hotel, airline, and other valuable partnerships.
Consider the valuation
Amex shares have been on a tear. Since the start of November, they have soared 65%. The S&P 500 is up 28% during this time. Maybe the market is rewarding the stock in the hopes that the Federal Reserve will cut interest rates, which could spur spending and borrowing activity among consumers.
Nonetheless, Amex’s impressive performance has made the shares less attractively priced. The current price-to-earnings (P/E) ratio of 18.1 is in line with the stock’s trailing-10-year average. Shares look fully valued at these levels.
That isn’t necessarily a bad thing. Of course, investors should desire a lower entry P/E multiple as it creates a scenario where the upside potential is larger than it otherwise would be. But Amex shares could still be worthy of buying consideration for those who prioritize valuation less than owning a high-quality enterprise.
American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
