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Credit card firm and Warren Buffett stock American Express Company (AXP) has been under growing pressure during the past few months, with shares slipping from $178 and change back in July to around $148, where it sits today. Altogether, the stock has shed around 30% from its all-time high around $195 per share, set back in early 2022.
A notable Wall Street analyst, Kevin Barker from Piper Sandler, rang the alarm bell on AXP back in July over student loan payment resumptions, slashing his price target to $149 from $172. A very well-timed call, given his downgrade came close to the stock's summertime peak.
As negative momentum picks up, American Express shares could find themselves flirting with a key level of support at around the $136-138 level. Indeed, this level marked the pre-pandemic high before shares nosedived off a cliff, as well as two major lows put in last year.
Technically speaking, American Express stock doesn't look all that timely - but that key support level isn't too far off now.
American Express: Ready to Weather an Economic Storm
Only time will tell if shares can sink below $140 over the near term. Regardless, the fundamentals and valuation couldn't look more attractive, especially given American Express tends to be resilient in the face of escalating macroeconomic headwinds. Additionally, the firm also seems well-equipped to handle proposed changes by the Biden administration to lower credit card late fees, at least according to analysts over at RBC.
Undoubtedly, American Express boasts some of the most creditworthy and affluent customers in the world. What may be troubling for other credit card firms stands to be relatively less noticeable for the firm. In light of the potential risk brought forth by the Biden Administration, RBC's Jon Arfstorm proceeded to hike his rating (Outperform from Sector Perform) and price target ($200 from $197) — a big vote of confidence. However, for now, the market didn't seem all too moved by the upgrade.
For August and July, consumer credit card metrics stayed pretty solid, with the delinquency rate inching to 1.2%, up from 1.1% month over month. The net write-off rate inched lower to 1.7%, down from 1.8% in July. As rate headwinds weigh more heavily on consumers, I don't expect much in the way of surprises regarding these metrics over the coming months.
How Will Spending Hold Up Should Recession Risks Escalate?
Unlike Visa (V) or Mastercard (MA), American Express is both a payment processor and an issuer. As such, it stands to benefit greatly as its cardholders spend more. Indeed, it's not a mystery as to why American Express has some of the most enviable (perhaps even overpowered) rewards in the industry — it wants cardholders to keep spending!
Even as the economic tides get a bit rougher over the coming quarters, the rich rewards (and perks) seem like more than enough reason for consumers to maintain spending habits. If anything, additional points accumulated from grocery purchases — American Express' Cobalt card offers a whopping 5x points on groceries, in addition to dining and food delivery — could help consumers offset the heavy blow of high food price inflation.
There's no question that it's tough to compete with the type of rewards and perks offered by the likes of an American Express. And it's a major advantage (thanks in part to higher merchant fees) that it has room to gain a bit of ground over its rivals in the credit card scene.
As a part of its growth, the company has targeted millennials with lifestyle cards that have more rewards for things this cohort values most: comforts and conveniences. Though targeting millennials, both in the U.S. and in Canada, seems like a wise long-term decision, there's some concern it could act as a near-term headwind amid the resumption of student loan repayments. The more cash goes to such loans, the less millennials will have to rack up debts on their American Express.
The million-dollar question is whether such consumers will need to curb their spending in a way that delivers a heavy blow to American Express. Arguably, such consumers have likely already accounted for student loan repayments many months ago. And after Piper Sandler's notable downgrade in July, it's arguable that the stock has already baked in these concerns, too.
Further, given how much of the biggest point rewards tend to be focused on necessities (groceries and gas), especially with its millennial-centric lifestyle cards like Cobalt, I do expect that American Express' younger cardholders may be more resilient than expected.
The Bottom Line on American Express Stock
Recent credit card metrics suggest American Express is a steady ship sailing into choppy waters. With strong fundamentals, a resilient cardholder base, a modest valuation, a key technical support level coming close, and the praise of an RBC analyst, I view the stock as an intriguing value option right here.
American Express stock seems way too cheap at 14.96 times trailing price-to-earnings, well below that of Visa and Mastercard. The dividend yield is also looking attractive at 1.90%.
On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
