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Debt is a mainstay of the US economy, which depends on consumer spending for about two-thirds of its output. Today, US credit card debt is approaching an all-time high of $1.2 trillion. In other words, to credit card companies and banks American Express (NYSE:AXP) they are making a profit.
The stock has soared, rising nearly 60% over the past 12 months. Is it too late to get on board? Or can American Express continue to deliver huge investment returns?
Here’s an analysis of whether the stock is a buy, sell or hold today.
American Express has been around since the mid-1800s, which is crucial because it has created a brand that resonates with consumers. The company is famous for its benefits and rewards for cardholders, making it popular with large spenders and small businesses alike. American Express captures value throughout the loan process. It not only maintains and profits from the loans people accumulate on their cards, but also operates the payment processing network. This means you earn swipe fees from merchants when you use your card.
The company is also innovating and evolving to stay relevant. Some may consider emerging buy now pay later (BNPL) companies are threatening legacy credit card brands, especially as BNPL is proving popular with young spenders. However, American Express has already tied BNPL to its brand and rewards program, and more than 60% of new customers in 2023 were millennials or Gen Z.
Consumer debt has been on a long-term upward trend for decades, so it’s hard to imagine it reversing any time soon. American Express is chasing 10% annualized revenue growth over the long term, which primes the pump for double-digit earnings growth. Analysts estimate that the company will grow earnings by an average of 14% annually over the next three to five years.
In short, the American Express business should continue to boom for the foreseeable future.
However, actions may not always follow. Good companies get a lot of attention, especially in booming stock markets, so the massive gains in American Express stock over the past year include growth that hasn’t happened yet. You can see how the stock’s valuation has risen substantially:
I like to use the PEG ratio to compare a stock’s price-to-earnings ratio with expected earnings growth. The ratio illustrates how much a company is paying for growth. American Express stock currently has a PEG ratio of 1.4 (according to the numbers in the chart above), comfortably within the range where I will buy high-quality stocks (up to a 2-to-2 PEG ratio, 5).
