American Express: The Underrated Payments Stock to Buy Now
💡 Key Takeaway
American Express's strong Q2 earnings and raised revenue guidance suggest the market is undervaluing its long-term growth potential, making it a compelling buy at 20 times earnings.
What Happened: AXP Lags Market Despite Solid Q2
American Express (AXP) stock has underperformed this year, down about 6% year to date, while competitors Visa and Mastercard are up 6% and flat, respectively. The broader S&P 500 and Dow Jones are each up 13%, and the financial sector is up 5%. This underperformance comes despite a strong second-quarter earnings report.
On July 24, American Express reported Q2 earnings that beat on the bottom line. Revenue increased 10% year over year to $19.6 billion, slightly missing estimates of $19.7 billion, but earnings per share of $4.53 beat expectations of $4.40. Credit quality remained strong, with provisions for credit losses and delinquency rates down year over year.
The company also raised its full-year revenue guidance to 10% growth, up from the previous 9-10% range. However, it kept its earnings guidance unchanged at $17.30 to $17.90 per share, implying about 14% growth at the midpoint.
Investors were concerned about rising expenses, which increased 12% in Q2 to $14.5 billion, outpacing revenue growth. Management attributed this to higher spending on customer engagement, marketing, and technology, which they say is necessary for long-term growth.
CEO Stephen Squeri emphasized that the company is winning with the next generation of premium customers and has significant growth opportunities globally. He expressed confidence in a long runway for sustainable growth, which is why the company is investing now.
Why It Matters: Market May Be Underestimating AXP's Growth
The market's lukewarm reaction to American Express's earnings and its year-to-date underperformance suggest that investors are focusing on near-term expense increases rather than the long-term growth potential. With only 48% of analysts rating AXP a buy, compared to 93% for Visa and Mastercard, there is a clear disconnect between the company's performance and its valuation.
American Express's raised revenue guidance and projected 14% earnings growth for 2026 indicate that the company is confident in its ability to grow despite macroeconomic headwinds. The investments in customer engagement and technology are aimed at maintaining high retention rates and attracting new premium customers, which should drive sustainable growth.
Trading at 20 times earnings, American Express is cheaper than its competitors. Visa and Mastercard trade at higher multiples, making AXP an attractive value proposition for investors seeking exposure to the payments industry.
The company's strong credit quality metrics, including lower provisions and delinquency rates, suggest that its premium customer base is resilient even in a challenging economic environment. This bodes well for future earnings stability.
As a long-standing holding in Berkshire Hathaway's portfolio, American Express has a track record of solid management and shareholder returns. The current investment phase, while impacting near-term margins, is likely to pay off in the form of accelerated growth and market share gains.
Source: The Motley Fool
Analysis generated by Bobby AI quantitative model, reviewed and edited by our research team. This is not financial advice. Always do your own research before making investment decisions.
Bobby Insight
American Express is an underrated buy at 20 times earnings with strong growth prospects.
The company's Q2 earnings beat, raised revenue guidance, and strategic investments in customer engagement and technology support a long-term growth runway. Despite near-term expense increases, the projected 14% earnings growth for 2026 and strong credit quality make AXP an attractive value compared to peers.
What This Means for Me
