Is American Express (NYSE: AXP) worth buying at its current valuation? In this clip from "The Rank" on Motley Fool Live , recorded on April 25 , Motley 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: This is Berkshire 's (NYSE: BRK.A) (NYSE: BRK.B) third largest holding now. They own a little over 20% of American Express. They are the credit card giant. I ranked this No. 8, even though I am a shareholder of it. And it's pretty much a valuation problem for me. Out of the three financials in Berkshire's Top 10, this is the one that I think looks the least attractively valued. That's not to say it's a bad business or that Berkshire should sell it or that I'm going to sell it or anything like that. AmEx is known as the credit card giant. And they are, out of the big credit card networks, Visa (NYSE: V) , Mastercard (NYSE: MA) , American Express, Discover (NYSE: DFS) , they're the biggest one that is a closed-loop network. Visa and Mastercard don't actually loan money. When you swipe your Visa card, it's essentially connecting your bank to the merchant's bank. It transfers money from your bank. Or, your bank's loaning you money if it's a credit card. American Express, when you swipe your American Express card, American Express is loaning you the money and sending it to your merchant's account. So they make money on two ways. They make money through what they call "discount revenue" but everyone else calls "merchant fees." That's the biggest source of their income. Every time you swipe your American Express card, the merchant is charged somewhere in the 2% neighborhood of that transaction. They also make money from card fees. If anyone has an American Express card, you probably know they have higher than average annual fees. The American Express Platinum is my go-to credit card, and it costs a lot of money in annual fees and it is worth it to a lot of consumers. It has free Uber (NYSE: UBER) credits. It has an airport lounge membership. It has all kinds of benefits that are really valuable to customers, particularly millennials, which I'll get to in a second. They also make money from interest, because they are a lender. Anyone knows that credit card interest rates are not cheap, so AmEx makes money off that. They also charge service fees for things like international money transfers, things like that. So, quick thing about American Express' business. If you're wondering, only a little over half of it comes from consumers like you and I, 38% of American Express' business come from small- and medium-sized business customers, a big focus area of theirs. And 7% comes from large enterprises, like corporate credit cards and things like that. The fastest growing area of American Express' business, by far, is the millennial generation. The products like the AmEx Platinum that I just mentioned, they 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 benefit, which you can use for Uber Eats credits too, which appeals to millennials a lot. Nine months out of ten that's what I use mine for. They have a $92 billion loan portfolio. They have a very, very good loan quality for a credit card issuer. Right now, their write-off rate is just 0.8% of their loan portfolio on an annualized basis, which is very low for a credit card provider. Most are in the 3-4% range. That is a big risk factor, in my opinion. If interest rates and inflation continue to rise, and we see a recession in 2022, there's-- out of all the major forms of lending, none of them will see a spike in defaults as high, as fast as credit cards will when the economy turns sour. But, great business all around. Very desirable client base. Lots of pricing power because of their client base. They can charge merchants a little more than Visa and Mastercard. And it is only about 10% off the highs, so actually one of the better-performing stocks this year. $138 billion market cap. I mentioned Berkshire's No. 3 stock. Guys, anyone have any thoughts on AmEx?
For further details see:
This Giant Credit Card Stock Could Climb Back to Its All-Time Highs
