Is one of Warren Buffett’s favorite stocks a buy?
One of the big concerns coming into the Q1 earnings season was how consumer spending would hold up. Credit card company American Express (NYSE:AXP) provided some insight Thursday with its strong first quarter earnings report.
The nation’s third largest credit card company saw revenue increase by about 7% in the quarter to around $17 billion. That was roughly in line with estimates.
Net income rose about 6% to $2.6 billion, while earnings climbed 9% to $3.64 per share. Earnings exceeded analysts’ estimates of $3.48 per share.
While American Express is a gauge of consumer spending, investors may get a broader view when Visa (NYSE:V) and Mastercard (NYSE:MA) report earnings in the coming weeks. That’s because American Express caters more to an affluent clientele, so their spending patterns might not be as impacted as less-wealthy individuals. It’s also why the other two credit card giants will give a broader view of where consumers are.
However, American Express’s wealthier clientele, and greater reliance on membership fees, make it an excellent stock for choppy and volatile markets like this.
Card fees boost revenue
Looking more closely at the Q1 numbers, it is clear that its membership and other fees helped boost revenue in the quarter. Specifically, net card fees spiked 18% in the quarter to $2.3 billion. While this is a smaller revenue stream, the increase buttressed discount revenue, which only rose 4% to $8.7 billion. Discount fees are essentially swipe fees that merchants pay every time something is purchased.
American Express’s third major revenue stream is interest income. As the company serves as its own bank, it loans the money to members for spending and then collects interest on the balances. Interest income rose 6% in the quarter to $6.1 billion. Also, due to lower interest rates, it paid out less in interest expenses, such as deposits, so its net interest income rose 11% year-over-year to $4.2 billion.
“Our performance across key areas, including Card Member spending, customer retention, demand for our premium products, and credit performance, continued to be strong across our customer base, consistent with and in many cases better than what we saw in 2024,” American Express chairman and CEO Stephen Squeri said.
American Express maintains its guidance
Investors are closely watching for changes in guidance or the outlook, given the uncertainty economy. And for American Express, specifically, it could be vulnerable to a pullback in travel, as it caters to the corporate and consumer travel markets.
So, the fact that American Express maintained its full-year guidance for revenue growth is a decent sign.
“Based on the steady spend and credit trends we have seen to date and the current economic outlook, we are maintaining our full-year guidance for revenue growth,” said Squeri.
The company is calling for revenue growth of 8% to 10% in 2025 and earnings of $15.00 to $15.50 per share, similar to January’s guidance, but “subject to the macroeconomic environment.”
That is a big caveat that many investors will be watching, but American Express is pretty well-equipped to handle it.
American Express stock was roughly flat on the day, trading at around $253 per share. It is down about 15% YTD with a P/E ratio of around 18. It has a median price target of $280 per share, which suggests an 11% increase.
American Express stock has always been a good all-weather performer that typically beats the market in tough times. It is why it is a favorite holding of Warren Buffett’s. Its average annual return of 12% over the past 10 years speaks to that consistency.
American Express, and credit card stocks in general, are typically solid investments in uncertain environments.
