The Pillar of the US Economy: A Closer Look at American Express
Consumer Spending: The Lifeblood of the Economy
The United States economy relies heavily on consumer spending, which accounts for approximately two-thirds of its output. As a result, credit card debt has become a significant contributor to the economy’s growth. With American credit card debt approaching an all-time high of $1.2 trillion, credit card companies and banks are reaping substantial profits.
American Express: A Brand that Resonates
American Express, founded in the mid-1800s, has built a brand that resonates with consumers. The company’s cardholder perks and rewards have made it a favorite among high-spenders and small businesses. American Express captures value throughout the lending process, holding and profiting from loans, as well as operating the payment processing network, earning swipe fees from merchants.
Innovating to Remain Relevant
The rise of buy now, pay later (BNPL) companies has led some to question the relevance of legacy credit card brands. However, American Express has successfully integrated BNPL into its brand and rewards program, attracting over 60% of new customers from millennials and Gen Z in 2023.
A Long-Term Growth Story
Consumer debt has been on an upward trend for decades, and American Express is poised to benefit from this trend. The company aims to achieve 10% annualized revenue growth, driving double-digit earnings growth. Analysts estimate an average annual earnings growth of 14% over the next three to five years.
Valuation: A Key Consideration
While American Express’ business is expected to thrive, its stock may not always follow suit. The company’s valuation has risen significantly, with a PEG ratio of 1.4, indicating that investors are paying a premium for its growth. As a lender, American Express is vulnerable to credit risk, which could impact its earnings in the event of a recession or credit crisis.
A Solid Buy for Long-Term Investors
Despite potential risks, American Express remains a solid buy for long-term investors. Assuming the valuation remains unchanged, investors can reasonably expect annualized total returns of around 15%. Even with some froth in the stock, American Express is capable of delivering low double-digit annualized returns, making it an attractive investment opportunity.
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