is American Express (AXP 3.58%) worth buying at the current valuation? In this clip from “The Rank”. Motley Fool Live, recorded on 25.4Motley Fool contributors Matt Frankel, Jason Hall, and Zane Fracek discuss where they ranked American Express and whether it’s a good buy given its current valuation.
Matt Frankel: That is Berkshire‘s (BRK.A 0.73%) (BRK. B 0.75%) now the third largest holding. They own just over 20% of American Express. They are the credit card giant. I have ranked this #8 despite being a shareholder of it. And it’s pretty much a rating issue for me. Of the three financials in Berkshire’s top 10, this is the least attractively valued in my opinion. That’s not to say it’s a bad deal, or that Berkshire should sell it, or that I’m going to sell it, or anything. AmEx is known as a credit card giant. And they are, from the major credit card networks, Visas (v 2.71%), MasterCard (MA 3.60%)american express, Discover (DFS 3.50%), they are the largest that are a closed loop network. Visa and Mastercard do not actually lend money. When you swipe your Visa card, it essentially connects your bank to the merchant’s bank. It transfers money from your bank. Or your bank will lend you money if it’s a credit card. American Express, when you swipe your American Express card, American Express lends you the money and sends it to your merchant’s account. So you make money in two ways. They make money from what they call “rebate earnings,” but everyone else calls it “merchant fees.” This is the biggest source of income. Every time you swipe your American Express card, the merchant is charged somewhere near 2% of that transaction. They also make money from card fees. If anyone has an American Express card, you probably know that annual fees are higher than average. The American Express Platinum is my credit card of choice and it costs a lot of money in annual fees and is worth it for many consumers. It has free above (ABOUT 4.72%) credits. It has airport lounge membership. It has all kinds of benefits that are really valuable to customers, especially millennials, which I’ll get to in a moment. They also make money on interest because they are a lender. Everyone knows that credit card interest rates aren’t cheap, so AmEx makes money from them. They also charge service fees for things like international money transfers and things like that. So, quickly to the American Express business. If you’re wondering, just over half of that comes from consumers like you and me, 38% of American Express’s business comes from small and medium-sized business customers, a large focus area of theirs. And 7% is from big companies, like corporate credit cards and the like. By far the fastest growing segment of American Express’ business is the millennial generation. The products like the AmEx Platinum that I just mentioned offer benefits and perks that are designed to really appeal to younger, affluent consumers, I guess you would call it. I mentioned airport lounges. The Uber rides are a very unique perk that you can also use for Uber Eats credits, which is very appealing to millennials. Nine months out of ten I use mine for this. You have a loan portfolio of $92 billion. You have a very, very good credit rating for a credit card issuer. Right now, their annualized write-off rate is just 0.8% of their loan portfolio, which is very low for a credit card company. Most are in the 3-4% range. I think that’s a big risk factor. If interest rates and inflation continue to rise and we see a recession in 2022, none of all major forms of credit will see a spike in defaults as much as credit cards will sour. But all around a great deal. Very desirable customer base. Lots of pricing power due to their customer base. They can charge merchants a bit more than Visa and Mastercard. And it’s only about 10% off the highs, so it’s actually one of the better-performing stocks this year. Market capitalization of $138 billion. I mentioned Berkshire’s #3 stock. Anyone have any thoughts on AmEx?
Jason Hall: Berkshire owns 20% of the company. I didn’t know it was that high. This is one I owned for a long time until I gave up my position earlier this year. I continue to love the business and if I get a really low review opportunity I will consider adding it. I was going to rate it higher but I agree with everything Matt said including the rating. That’s why I ranked it lower. I’m very curious Zane, you rated it really high. I’m really curious to hear your thoughts.
Zane Fracek: Yes, I ranked it higher, especially as the brick and mortar banks like Bank of America (BAC 0.28%) I think. Did I rate it higher than Bank of America? I did. A few points higher than Bank of America and U.S. Bancorp (USB 0.02%), just because I’m a big fan of I think the less brick and mortar the better. That’s how I see stocks in general. For this reason I am very hesitant to go into retail. Not to say they can’t be great investments. That’s exactly how I work and I love the American Express brand. I mean, from my perspective, I understand that American Express has a different niche as a closed-loop credit card company. But if you look at MasterCard and Visa’s valuation, I think American Express looks pretty good, at least in terms of price-to-earnings. They’re lower than both MasterCard and Visa, so I think they’re pretty attractive here.
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