American Express: Buy, Sell, or Hold?

Source The Motley Fool

Debt is a pillar of the U.S. economy, which depends on consumer spending for roughly two-thirds of its output. Today, American credit card debt is approaching $1.2 trillion, an all-time high. In other words, credit card companies and banks like American Express (NYSE: AXP) are raking in profits.

The stock has galloped higher, soaring almost 60% over the past 12 months. Is it too late to get on board? Or can American Express continue delivering outsized investment returns?

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Here's an analysis of whether the stock is a buy, sell, or hold today.

The company looks primed for long-term growth

American Express has been around since the mid-1800s, which is crucial because it has built a brand that resonates with consumers. The company is famous for its cardholder perks and rewards, making it popular with high-spenders and small businesses. American Express captures value throughout the lending process. Not only does it hold and profit from the loans people accumulate on their cards, but it also operates the payment processing network. That means it earns swipe fees from merchants when you use your card.

The company is also innovating and evolving to remain relevant. Some may consider emerging buy now, pay later (BNPL) companies threats to legacy credit card brands, especially since BNPL is proving popular with young spenders. However, American Express has already tied BNPL into its brand and rewards program, and over 60% of new customers in 2023 were millennials or Gen Z.

Consumer debt has been in a long-term uptrend for decades, so it's hard to imagine that reversing anytime soon. American Express is pursuing 10% annualized revenue growth over the long term, which primes the pump for double-digit earnings growth. Analysts estimate the company will grow earnings by an average of 14% annually over the next three to five years.

To summarize, American Express' business should stay booming for the foreseeable future.

The stock's performance has driven the valuation up

Yet, the stock may not always follow along. Good businesses attract a lot of attention, especially in thriving stock markets, so the massive gains American Express stock enjoyed over the past year include some growth that hasn't happened yet. You can see how the stock's valuation has risen substantially:

AXP PE Ratio (Forward) Chart

AXP PE Ratio (Forward) data by YCharts

I like using the PEG ratio to compare a stock's price-to-earnings ratio to its anticipated earnings growth. The ratio illustrates how much you're paying for a company's growth. Currently, American Express stock's PEG ratio is 1.4 (based on the numbers in the chart above), comfortably within the range I'll buy high-quality stocks at (up to a PEG ratio of 2 to 2.5).

As a leading lender with a valuable brand and in-house payment network, I think American Express deserves that quality badge.

Should investors buy, sell, or hold?

However, I don't expect American Express to trade at a PEG ratio as high as most other companies with comparable growth rates. As a lender, American Express is vulnerable to credit risk. If a recession or other credit event hampers people's ability to pay their credit card bills or borrow money, it could devastate the company's earnings.

I still think American Express is a solid buy today for long-term investors, but I'd be surprised to see the stock return anything close to the 60% investors have seen over the past year. Assuming the valuation doesn't change, investors can reasonably anticipate annualized total returns of around 15% (14% growth and 1% dividend yield). Even if there is some froth in American Express today, it seems capable of low double-digit annualized returns, barring something dramatic.

That's plenty of upside from such an established name to give investors the green light to buy shares.

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American Express is an advertising partner of Motley Fool Money. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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