East American Express (AXP 3.58%) is it worth buying at its current valuation? In this clip from “The Rank” on Motley Fool live, recorded on April 25Motley Fool contributors Matt Frankel, Jason Hall and Zane Fracek explain where they ranked American Express and whether it’s a good buy given its current valuation.
Matt Frankel: It is Berkshireit is (BRK.A 0.73%) (BRK.B 0.75%) third largest to have now. They own just over 20% of American Express. They are the credit card giant. I classified this n°8, even if I am a shareholder. And it’s more of a rating issue for me. Of the three financial stocks in Berkshire’s Top 10, it is the one that, in my opinion, looks the least attractive. That doesn’t mean it’s a bad deal or Berkshire should sell it or I’m going to sell it or anything like that. AmEx is known as the credit card giant. And they are, out of the major credit card networks, Visa (V 2.71%), MasterCard (MY 3.60%)American Express, Discover (DFS 3.50%), they are the largest which is a closed-loop network. Visa and Mastercard do not 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 lends you money if it’s a credit card. American Express, when you swipe your American Express card, American Express lends you money and sends it to your merchant’s account. So they make money in two ways. They make money from what they call “discount income”, but everyone else calls it “merchant fees”. It is the biggest source of their income. Every time you swipe your American Express card, the merchant is charged somewhere in the neighborhood of 2% of that transaction. They also make money from card fees. If someone has an American Express card, you probably know that they have above-average annual fees. The American Express Platinum is my favorite credit card, and it costs a lot of money in annual fees and is well worth it for many consumers. It has free Uber (UBER 4.72%) credits. He has a subscription to the airport lounge. It has all kinds of benefits that are really valuable to customers, especially millennials, which I’ll get into in a moment. They also earn money from interest because they are a lender. Everyone knows that credit card interest rates aren’t cheap, so AmEx makes money off of it. They also charge service fees for things like international money transfers, things like that. So, a quick thing about American Express business. If you’re wondering, just over half comes from consumers like you and me, 38% of American Express’ business comes from small and medium-sized businesses, one of their primary areas of focus. And 7% comes from big business, like corporate credit cards and things like that. By far, American Express’ fastest growing area of business is millennials. Products like the AmEx Platinum that I just mentioned, they offer perks and benefits that are designed to really appeal to younger, affluent consumers, I guess you’d call it. I mentioned airport lounges. Uber rides are a very unique perk, which you can also use for Uber Eats credits, which is a big hit with millennials. Nine out of ten months, that’s what I use mine for. They have a $92 billion loan portfolio. They have very, very good loan quality for a credit card issuer. Right now, their write-off rate is only 0.8% of their loan portfolio on an annualized basis, which is very low for a credit card provider. Most are between 3 and 4%. That’s a big risk factor, in my opinion. If interest rates and inflation continue to rise, and we see a recession in 2022, there is – of all the major forms of lending, none of them will see a spike in defaults as high, as fast as credit cards when the economy turns sour. But, good deals all around. Highly sought after clientele. Lots of pricing power due to their clientele. They may charge merchants a bit more than Visa and Mastercard. And that’s only about 10% off the highs, so makes it one of the best performing stocks this year. Market capitalization of $138 billion. I mentioned Berkshire’s #3 stock. Guys, anyone got an idea on AmEx?
Jason Hall: Berkshire owns 20% of the company. I didn’t know it was that high. It’s the one I owned for a long time until earlier this year when I left my post. I continue to like the company, and if I get an opportunity at a very low valuation, that’s the one I’ll consider adding. I wanted to rank 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 very high. I’m really curious to hear your thoughts.
Zane Freck: Yeah I rated it higher especially than brick and mortar banks like Bank of America (BAC 0.28%) I think. Did I rate it higher than Bank of America? I did it. A few more points than Bank of America and American bank (USB 0.02%), just because I’m a big fan of, I guess, the less brick and mortar the better. That’s kind of what I think of stocks in general. I’m very hesitant to get into retail for this reason. That’s not to say they can’t be great investments. That’s how I operate and I love the American Express brand. I mean, from my perspective, I understand that American Express is a closed loop credit card company. But if you look at the valuation of MasterCard and Visa, I think American Express actually looks pretty good, at least on a price-earnings multiple. They are cheaper than MasterCard and Visa, so I think they are quite attractive here.