2025: Is American Express a Buy?

American Express (AXP) appears to be growing and has performed quite well recently with many analysts supporting the view that the company’s stock is a good buy. While the company may not be considered a fintech stock, the Motley Fool has noted its increasing list of tech-focused products. Including digital credit cards and mobile payments, and its buy now, pay later (BNPL) offerings, place it within the world of fintech.

It is noteworthy to mention that the stock is also the second-largest holding Warren Buffett has in his Berkshire Hathaway portfolio. He has held the stock since 1991, which exemplifies a buy and hold investment strategy.

Q3 earnings of American Express

In its Q3 (which ended Sept. 30), American Express performed exceptionally well,

with sales increasing 8% year over year to reach $16.6 billion and diluted earnings per share rising 6% to $3.49. Card members also increased their spending by 6% in the quarter, with American Express adding 3.3 million new card acquisitions.

This is the result of attracting many younger members. As millennials and Gen Z made up 80% of new card acquisitions.

This was specifically for its premium Gold Card in the quarter.

American Express: $230 million settlement

American Express is expected to pay $230M to settle claims of deceptive practices. These claims involve selling credit card and wire transfer products to small business customers.

The credit and traveller services provider will pay $138.4m, including about $108m in penalties. It will also sign a non-prosecution deal, halting the DoJ’s criminal and civil investigations.

After crediting, American Express will pay about $230 million under the terms of the agreements. The company stated this in a release on Thursday.

It also stated that it has agreed to the terms with its regulators at the Federal Reserve of America. The parties are expected to finalize the details in the next few weeks.

Dubious credit card sales techniques

According to the DOJ, employees provided false and misleading information about card rewards and fees to obtain sales.
They also checked credit reports without permission.

Periodically, staffers would initiate unwanted cards, as documented by The Wall Street Journal in 2020.

Another apparent fraud detailed in the Justice Department’s press release was how salespeople could forge financial details.
This included inflating the income of a business.

AmEx also sought to fraudulently induce its federally insured financial institution to allow customers to receive credit cards without EINs, as required.

The DOJ stated that AmEx provided “dummy” EINs, such as 123456788, during 2015 and 2016.

Misrepresentation of wire products

Besides the dubious credit card sales techniques, the AmEx workers allegedly misrepresented wire products – telling clients that the products would enable them to escape taxes, said the prosecutors.

In 2018 and 2019, AmEx introduced two wire products – Payroll Rewards and Premium Wire.

Customers, mainly small and mid-sized businesses, were told that the fees are tax-deductible business expenses.

However, when the wire service was not used, customers had to pay taxes on the fees, prosecutors said.

Customers were also informed that the reward points from the transaction were earned tax-free – but that was based on the wrong tax advice, and the wiring fee was not a wholly tax-deductible business expense.

Another scrutiny in early 2021 led to the dismissal of about 200 workers. The Prosecutor’s office discovered that the wire products were phased out in the same year.

The company asserted that it worked with agencies and regulators on the issue, in addition to laying off some of its workers, demoting others, altering the training involved and revising its pay structures.

Other major firms, such as Block, have also recently agreed to pay similar amounts to regulators. Mastercard also committed $26 million to settle the claims that the company has been for years underpaying female, black, and Hispanic workers, as stated in the court filing this week.

Earnings results coming up (24 January)

The financial year 2024 was especially good for AXP as the overall stock return was almost 60%. Therefore, the bar is set high as we enter the earnings next week. The stock has been increasing fairly smooth throughout 2024.

Market Expectation for American Express

Coming into Q4 earnings, market expectations for EPS are for 16.4% yoy growth, which would be higher than Q3’s 8% growth and Q4 2023 11.5%. Revenue growth of around 9% will be nearer the company’s ideal 10%+.

December’s retail sales increased by 0.4% month-on-month which missed market expectations of 0.6% growth. Retail sales for October and November were better than expected presenting a mixed picture.

Earnings

AXP has had a mixed earnings track record in the last two years. Coming into earnings, AXP looks pricier compared to its history on a headline P/E basis.

American Express is a great business due to the strength of brand and exposure to a higher tier of premium customer, who are typically more economically robust as a customer base.

According to Interbrand, American Express is the 27    most valuable brand globally, and its strength and appeal can explain the premium valuation.

リスク

The main risk to AXP is a significant slowdown in the consumer. Based on a spend-centric model which heavily relies on consumer confidence, AXP has retained a strong customer base.

In the short-term the firm also faces the risk that market expectations are unsustainably high and following a 60% rise in 2024, investor sentiment is very high. An earnings result that is good but not great could disappoint and push the stock’s price down.  

Conclusion

Q4 estimates are expected to be high, with the firm needing to report at least 16%+ EPS growth to meet the expected figures. The firm has been inconsistent in its performances of earnings and revenue within the last few quarters, therefore, the outcome of next week’s earnings remains uncertain.

In any case, investors should avoid paying any attention to short-term results and instead look at the company’s sustainable fundamentals AXP has to offer. As analysts have noted, the stock poses a buy option as they remain confident in the stock throughout 2025.

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