Is It Too Late to Buy American Express Stock?

Shares of American Express (NYSE: AXP) have skyrocketed to an all-time high with a 44% return this year, outperforming the 20% gain in the S&P 500 index. The financial services giant has benefited from resilient macroeconomic conditions, driving solid growth and stronger earnings. Shareholders have had plenty to cheer about lately.

On the other hand, investors on the sidelines may wonder if it's too late to jump in and buy shares. Can the rally in shares of American Express stock continue?

Industry-leading fundamentals

American Express is recognized as operating the world's fourth-largest payments network, based on transaction volume. The company stands out from peers like Visa and Mastercard in its vertically integrated business model. American Express has found success beyond the membership-based network by directly issuing credit and charge cards within a broader financial platform that includes lending options, insurance, merchant solutions, and travel services.

The strategy to focus on the premium consumer space while catering to business and corporate customers has proven highly lucrative, and the latest numbers tell the story. In the second quarter, American Express delivered 9% foreign-exchange-adjusted revenue growth with a 21% increase to adjusted earnings per share (EPS).

What caused the blistering rally in the stock price this year? The big surprise has been the company's ability to manage a deceleration of top-line growth from double-digit momentum in recent years while still generating record-high profitability. This was achieved by shifting toward more card fees while controling operating expenses.

A backdrop of stronger-than-expected global economic growth, coupled with high interest rates, has translated into a 20% increase in net interest income, compared to Q2 2023, even as card delinquencies have remained stable and below pre-pandemic levels. Similarly, net card fees increased by 15%, capturing the continued expansion of the member network and new card issuance.

The trends have been good enough to boost management's confidence in the forward outlook. American Express sees full-year revenue between 9% and 11% with an EPS target of $13.30 to $13.85. This was notably revised higher, compared to the prior $12.90 midpoint estimate.

Image source: Getty Images.

Room to stay bullish on American Express

There's a lot to like about American Express as a blue chip industry leader with several operating and financial tailwinds. A major market development has been the move by the Federal Reserve to cut interest rates in September for the first time since 2020. The policy shift acknowledging the favorable trend of decelerating inflation provides relief for businesses and consumers looking to acquire credit.

For American Express, less restrictive monetary policy, along with the potential for further Fed rate cuts, should lead to a rebound in demand for loans and the company's credit services. In this environment, the bullish case for the stock is that key metrics, including total network transaction volumes and card services billed, capture a boost of activity that may outperform expectations.

In terms of valuation, American Express stock is trading at about 20 times management's full-year EPS guidance. There's a case to be made that this level remains a bargain next to payment-industry peers like Visa and Mastercard, which trade at a P/E of 29 and 35, respectively.

Notably, American Express international card services outside the United States currently contribute around 20% to its global-payments network business but have seen revenue accelerate in recent quarters. The opportunity for American Express to expand globally and consolidate market share adds a layer of diversification that could support an expansion of the company's valuation multiple over time. This could be a long-term catalyst for the stock.

AXP PE Ratio (Forward) data by YCharts.

The big picture for investors

I believe American Express stock deserves a place in investor portfolios and is well-positioned to continue rewarding shareholders. It likely won't be a straight line higher from here, but I expect more upside in the stock into 2025 and beyond. For investors with a long-term view, one strategy to consider is dollar-cost averaging to build a position in the stock as a method to minimize timing risk.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.