Credit card and payments company American Express (AXP -0.28%) has long been a favorite of legendary investor Warren Buffett. His conglomerate, Berkshire Hathaway (BRK.A 0.32%) (BRK.B 0.41%), first invested in American Express in 1994, and he hasn’t looked back. It’s now the fourth-largest position in the Berkshire Hathaway equity portfolio, accounting for 7.5% of its assets.
In conjunction with the release of its fourth-quarter results, American Express provided stellar guidance despite the uncertain economic outlook, leading to a run-up in shares. Let’s take a look at that guidance and why the company could achieve it.
A premium business
American Express is guiding for 15% to 17% revenue growth this year and earnings per share of $11 to $11.40. That upbeat forecast caught the Street off guard because many economists are expecting a mild recession this year. Recessions usually cause slowdowns in consumer spending as well as higher loan defaults, both of which would hurt American Express.
CEO Steve Squeri told analysts on the company’s earnings call that management can only run the business based on actual trends they are seeing, and right now, American Express’ premium customer base is spending right through the higher inflation.
Its fourth-quarter results reflect this. Total volume across the network jumped 5% from the third quarter and was up 12% year over year from a strong Q4 2021.
Additionally, the U.S. consumer is still spending at a high clip, especially when you look at the way spending has grown among the company’s millennial and Gen Z customers in recent years. Goods and services spending is way above pre-pandemic levels, as is travel and entertainment spending. International card services spending is also now in “steep recovery mode.”
Credit quality has also remained exceptionally strong. The net loss rate of total loans at American Express was only 1.1% in the fourth quarter, which was well below pre-pandemic levels, and management expects the rate to remain below pre-pandemic levels throughout 2023.
Squeri also attributes American Express’ durability to its multidimensional business model, which includes recurring subscription fees on its card products, fees on the transactions it facilitates through its payments network, and recurring loan interest payments. American Express once again had a strong quarter for new accounts, acquiring 3 million new members. Squeri noted that 70% of its cardholders now have an AmEx card product with an annual subscription fee.
Why it’s a Buffett favorite
American Express’ strong revenue guidance and its expectations to grow earnings by at least 12% in what could be difficult economic conditions show why the company is one of Buffett’s favorites. The Oracle of Omaha looks for companies that can generate consistent financial performance through a range of economic conditions.
American Express has a special customer base that is weighted toward higher-net-worth individuals who have more ability to withstand mild recessions and keep spending despite unusually high inflation. Sure, nobody is immune to all economic conditions, but if there is a credit card company and payments firm you want in your portfolio during a recession, it’s American Express.
American Express is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.