The Oracle of Omaha, Warren Buffett, once said: “You can’t create another American Express.” With the company becoming one of the stalwarts of his multi-billion-dollar portfolio, investors certainly keep a close eye on the financial giant’s developments to gauge whether the fundamentals once seen by Buffet continue to hold firm.

The shares of American Express (NYSE: AXP) have recently contracted close to 12% amid a global banking sector selloff on the back of the Silicon Valley Bank fallout. Industry leaders like Wells Fargo failed to be spooked, urging investors to buy the dip in this company to benefit from its highly lucrative rewards. 

Technical 

The shares have gapped down in three consecutive trading sessions, with another pre-market contraction down to $157,83 on the cards. Market fear could force the share price to break below the $157,73 support, opening up a runway for another slide to lower support at $150,69. If the market fails to provide support at this level, the lower support of $143,56 could be reached as bearish pressure mounts. However, the company’s fundamentals remain unchanged, and a longer-term convergence to fair value could open up opportunities for investors to realise attractive potential upsides. A fundamental pivot could open up this possibility for convergence to the estimated fair value of $176,12.  

Fundamental 

American Express has grown to build a resilient business model that benefits them in developing an economic moat within their industry. The business targets customers and small businesses willing to pay higher fees to benefit from exciting and lucrative awards that no competitor offers. Their dual-sided payments system allows them to generate revenue from both merchants and cardholders, which enables them to remain profitable while offering valuable rewards and benefits to its cardholders, creating a high barrier to entry. The company has also placed emphasis on high-spending customers, allowing them to offer premium services and rewards that other payment networks struggle to compete with. The result has been the formation of a loyal customer base that is willing to pay increased fees for the exclusive benefits. 

In their latest financial report, the company boasted 133,3M active cards, reflecting massive growth from the 114M they had back in 2018. The increased number of active cards has resulted in higher payment volumes and impressive revenue growth. In 2022, their total network volumes spiked 24% year on year, while revenue net of interest expense expanded by 25% to $52,9Bn, with the company expecting another 15%-17% growth in the next financial year. It is also worth noting that the majority of their cardholders fall under the millennial and Gen-Z categories. Therefore, a tailwind exists as these customers could increase their spending as they mature and grow their personal income. This leaves the company with the simple task of steadily acquiring more cardholders over the next couple of years to maintain their excellent dividend payouts, another attractive feature the company offers. The company recently announced another 15% increase to their quarterly dividend from $0,52 to $0,60 per share, along with an announced 120M share repurchase plan as they continue to reward investors.  

Compared to other major players like Visa and Mastercard, American Express also seems to be relatively undervalued. Their Price/Earnings multiple of 16,6X following the recent selloff is almost half what their competitors offer. Their Price/Book multiple confirms the relative undervaluation, with their 4,9X multiple levels below the 12,9X offered by Visa. Mastercard appears to be the most overvalued in the industry, led by these three main players, as the graph below indicates. 

Summary 

Macroeconomic headwinds could see American express experience more downside as fears surrounding the financial industry weigh on the market. However, suppose the company can continue successfully implementing their differentiated business model to capture new customers and maintain its loyal base. In that case, investors could capitalise on these downturns to realise meaningful potential upside if the company manages to converge to its estimated fair value of $176,12. 

Sources: Koyfin, Tradingview, Reuters, Yahoo Finance, Business Insider, American Express Company