For investors of American Express Company (NYSE: AXP) stock, it wasn’t always about the plastic.
Founded in 1850 by Henry Wells, William G. Fargo and John Butterfield, American Express’s early business model was well-suited for the times — to deliver money and packages over long distances to people who really had no other way to get them.
In fact, the company was an early investor, along with Wells Fargo & Co. ( WFC), in the Pony Express, and ran so-called packet boats down the Illinois River to customers in Illinois, Iowa and Ohio.
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Almost 170 years later, American Express is a well-known, even iconic global financial brand, with $33.4 billion in revenues in 2017, and more than 55,000 employees all over the globe.
Yet the company faces the same 21st century challenges that all of the traditional financial services companies face — more aggressive competition, the shift from paper-based currency to digital payments made online and via mobile, and a changing customer demographic that demands advanced user technologies and a high standard of customer service.
How is American Express adapting to major cultural, demographic and technological shifts? As well as can be expected, investment experts say.
AmEx stock is undergoing some severe turbulence, but earnings are up, and generally strong sentiment from analysts and money managers — at a time of great change for the company and for the financial industry.
American Express Stock at a Glance
American Express is trading at $98 per share, with a consensus one-year $115 per share estimated outlook from analysts.
The company boasts a robust market cap of $84 billion and pays a 1.6 percent dividend, which is healthy for a credit card company.
American Express also seems to be rolling along at a nice clip, financially. The company has generated steady earnings over the past few quarters, at 3.2 percent, and sees an estimated earnings growth rate of 4.5 percent on a year-to-year basis.
On the downside, AXP has taken investors for a roller-coaster ride in late 2018.
In December the company saw its stock price plummet from $112 to $95. Analysts don’t appear to be worried about AXP, however, as the company is widely viewed as a prudent steward of assets, with an abundant amount of cash on hand and relatively low debt.
Pros to Buying American Express Stock
Many analysts seem generally bullish on AXP, with, as always, a few reservations.
“AXP stock seems to be a pretty solid bet, although nothing is guaranteed,” says David Bakke, an analyst at MoneyCrashers.com. “Earnings in the third quarter surpassed expectations, allowing AmEx to raise its forecast regarding earnings per share. Revenue is up close to 10 percent as well.
[See: 9 Stocks That Pass the Warren Buffett Buy Test.]
“Those gains were largely due to an increase in consumer credit card spending, revenues from loans and income from fees,” Bakke says.
American Express is also taking strides to remain competitive in an environment that is shifting more toward digital payments.
“It recently partnered with GreenSky, which provides cutting-edge point of service loan technology to various businesses,” Bakke says. “The payment network currently being used by American Express is in line for an upgrade as well, most likely in response to the shift toward the emerging digital payments society. ”
As long as safety and security remain at a high level, the entire digital payments sector will most likely achieve good results moving forward. “But again, you can assume nothing with stocks and sectors, especially as the recent stock market sell-off and ensuing recovery would show,” Bakke says.
It’s also OK to view American Express as a cornerstone stock to buy in a portfolio.
“AXP is one of my favorite stocks and is a wonderful core holding for the average investor,” says Robert R. Johnson, a finance professor at Creighton University in Nebraska. “None other than Warren Buffett has been a long-time shareholder of AXP.”
In the mid-1960s, Buffett bought 5 percent of American Express with 40 percent of the Buffett Partnership capital (approximately $13 million), Johnson says. “Now Berkshire (Hathaway, BRK.A, BRK.B) holds 151 million shares worth approximately $14.3 billion, he says. “American Express is now Berkshire’s fourth-largest equity holding behind only Apple ( AAPL), Bank of America ( BAC) and Coca-Cola ( KO).”
The stock trades at a consensus forward price-earnings ratio of a below-market 12.1, and it sells at remarkably low PEG ratio (P/E divided by expected growth) of 1.06, Johnson notes.
“A good sign for AXP and other financial services stocks is that Berkshire Hathaway spent approximately $14 billion on the purchase of financial services stocks in the third quarter, with the sector accounting for 40.7 percent of Berkshire’s reported equity portfolio at the end of September,” Johnson says. “This compares to the 14 percent financials weighting in the broader S&P 500 index.”
Others agree, noting that AXP represents good value heading into what many market commentators view as a declining market in 2019.
“We believe American Express is a good value stock for the long-term investor,” says Michael Osteen, chief investment strategist at Port Wren Capital in South Carolina. “On the positive side, we see both P/E and P/B close to its one-year low. Their one-year free cash flow growth of 90.4 percent, along with their three-year average of share buybacks, are strong indicators of higher share prices over time.”
Additionally, the current low price is due to overselling related to their issuing new debt and missing revenue estimates, Osteen says. “At its current share price and estimated EPS into 2020, we believe it is currently undervalued,” he says.
Cons to Buying American Express Stock
On Jan. 18, Amex reported fourth-quarter profit numbers that missed consensus Wall Street analyst expectations, as AXP customer credit spending slowed for the quarter. AXP stock fell by 2 percent within hours of the earnings release.
Some industry observers say that it’s no surprise credit card providers like American Express are experiencing some speed bumps with earnings. In fact, it’s a trend that could strengthen in future quarters.
“Credit card providers are facing a number of challenges in the coming years,” says Dean Kaplan, president of The Kaplan Group, a commercial collections agency. “Credit card companies earn revenue in three ways: annual fees, transaction fees, and interest income.”
“Now, though, consumers have a rapidly expanding set of alternatives with lower costs that is putting substantial pressure on the long-term outlook for credit cards since they combine lending with higher transaction costs,” Kaplan adds.
Industry insiders agree with that sentiment, noting that the competitive landscape is changing, and not in a direction that traditional card providers like Amex would favor.
“There are tons of challenges facing card providers these days,” says Cyndie Martini, chief executive officer at Member Access Processing, the largest aggregator of card services for credit unions in the U.S.
The first is keeping up with innovation in the market, Martini says.
“The fintechs are challenging the legacy networks like Amex, and issuers wherever they can,” Martini says. “This constant “turn” in innovation is both expensive, and a huge drain on resources for card providers.”
The second issue is that credit cards are pretty much the same across the industry, and are viewed by consumers as “payment utilities,” diluting brand loyalty and differentiation. “This is having a big impact on rewards, the third big challenge,” Martini adds. “The only real differentiator for cards is rewards, which require card providers to invest heavily in order to remain competitive.”
Other Wall Street insiders say aren’t bashing AXP alone when they see the stock price sliding downward.
Instead, they view the stock as a victim of a broader sliding market, much like investors saw in December when the major stock indexes fell by at least 8.7 percent.
“AXP is headed to about $100 by the end of January 2019, but longer term, I anticipate it dropping to about $80 by this summer,” says Surjit Chhabra, founder of the Stockmarketpredictionsdaily.com market analysis website. “That’s not because there is anything wrong with the company, but because the entire market is in a bear market right now.”
The first quarter of 2019 could be problematic, too, for AXP, as a consensus analysis of analysts who track the stock see revenues falling from $10.56 billion to 10.44 billion in the quarter ending March 31.
Additionally, AXP It isn’t a big dividend play (despite its dividend rate relative to credit card industry competitors) “as its forward dividend yield is only 1.65 percent,” Johnson says.
The Bottom Line on American Express Stock
If you view the market as sliding into a deep trough, American Express represents a good, steady long-term value play, as Osteen points out. In other words, it will still be a good stock to own at the end of 2019.
[Read: How Savvy Investors Beat a Stock Market Slowdown.]
Yet if you’re looking for a quick strike, AXP may churn upward a few points, as Chhabra notes.
But be prepared to sell more quickly than usual, as the stock could experience some major turbulence as broader negative market factors weigh in, and downside market events occur that are out of American Express management’s control.
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Pros and Cons to Buying American Express Stock (AXP) originally appeared on usnews.com
