Besides wholly owning numerous operating businesses, Berkshire Hathaway also has many different individual stocks to its name. With legendary investor Warren Buffett leading the way, returns have been magnificent over the years.
The conglomerate currently owns almost 22% of the outstanding shares of a top credit card business, which makes up 15% of the entire $288 billion portfolio (as of March 4). This leading financial stock has been a major winner, rising 7,600% since its initial public offering (IPO) in 1972. Add in dividends, and the total return is even better at 17,100%.
Let’s learn more about this company and decide whether it’s worth buying right now.
Durable competitive strengths
Berkshire has owned shares of American Express (AXP -2.27%) for decades. Buffett appreciates companies that have an economic moat — a durable competitive advantage that helps a company maintain its industry position.
Amex has a strong brand in the financial services industry. It made a name for itself by offering premium credit cards, like its popular Gold and Platinum cards, that come with high fees and attractive perks. This positioning naturally targets an affluent customer base that’s able to spend more than the average consumer.
The company also operates a closed-loop payment system, only allowing its own cards to run transactions. This creates another advantage for Amex — a network effect.
As of Dec. 31, there were 146 million “cards-in-force” (issued cards that are still open), showcasing the number of its products actively in use by consumers. On the other side, roughly 90 million merchants across the globe accept Amex as a payment method. As the number of cards and acceptance locations increases, the entire Amex platform becomes more valuable to everyone involved. This setup is hard to beat.
Steady financial performance
Over the past decade, American Express posted 92% revenue growth and 152% growth in diluted earnings per share (EPS). The gains have been a direct result of adding new customers, increasing payment volume, and generating higher fees from its cards.
As we look ahead, it’s easy to be optimistic about the company’s growth prospects. For starters, the business benefits from the expansion of the overall economy, as greater spending activity translates to more revenue-generating potential. Amex also gains from the growth of cashless transactions at the expense of cash and paper-based methods.
Plus, the company is doing a good job of bringing on younger consumers. As these people get older, become wealthier, and spend more, Amex will benefit.
“Across the industry, the number of millennials and Gen Z consumers with premium products are growing at an even faster rate, and we’re adding highly creditworthy customers in these cohorts faster than the industry, with substantial room to continue this growth,” CEO Stephen Squeri said on the Q4 2024 earnings call.
What about valuation?
Besides Amex’s moat, the company’s steady financial performance over the years is another factor that Buffett likes. But even though the Oracle of Omaha is a huge shareholder, other investors shouldn’t jump into the stock just yet.
It’s worth taking the time to also consider the valuation. In the past 16 months, shares of American Express have surged 100% higher. That type of gain for a mature business is noteworthy. Perhaps the market became bullish about the effects of lower interest rates on new card approvals and spending behavior.
As things stand today, it’s safe to say the stock isn’t cheap. The current price-to-earnings (P/E) ratio of around 20 is above the three-, five-, and 10-year averages. I don’t see a margin of safety at the current valuation.
American Express is a top Buffett holding. But investors eyeing the stock should wait for a better valuation to buy.
American Express is an advertising partner of Motley Fool Money. 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.