Berkshire Hathaway, the conglomerate long headed by Warren Buffett, owns dozens of stocks in its massive public equities portfolio. Investors would be wise to look here for potential buying opportunities.
One unstoppable financial stock with a 15% weighting in the Oracle of Omaha's portfolio has soared 58% in 2024 (as of Dec. 9). Should you invest $100 in this company right now?
Unique position in the payments landscape
The financial services business that has crushed the market this year is credit card heavyweight American Express (AXP -0.97%). It has been a longtime holding for Berkshire.
Amex is uniquely positioned in the industry. It's known for offering premium credit cards with high annual fees and compelling perks and rewards. By being a card issuer, the company makes money from interest payments on any outstanding balances. This means Amex competes directly with banks like JPMorgan or Capital One, for instance.
However, American Express also runs the communications platform that allows for the processing of transactions. It connects consumers and merchants, collecting revenue for this activity as well. This means Amex is a competitor to Visa and Mastercard.
From a high level, it appears that American Express essentially takes all of the economics anytime one of its cards is swiped as a method of payment. It earns fees and interest from consumers, while also collecting money from merchants who use its platform.
Attractive qualities
Now that you have a high-level understanding of how this business works, it's worth pointing out the very favorable characteristics American Express possesses. I've identified three key factors that stand out.
First is the company's brand presence. Amex positions itself as a premium offering in the industry, which naturally attracts affluent customers with higher spending ability. In the three-month period that ended Sept. 30, the business generated $105 in average fees per card, up 13% year over year and 78% higher than the third quarter in 2019. This is a clear indication of pricing power.
Another factor to consider is the company's network effects. This is true for any two-sided payment platform. As of Sept. 30, there were more than 145 million American Express cards active around the world that are accepted at 89 million merchant locations. The network is valuable for both groups because of the size of the other group. This creates a positive feedback loop that is hard to disrupt.
Historically, American Express has been able to post solid financial results, which is another trait investors will appreciate. Net revenue has climbed at a yearly pace of 7.2% in the past decade, with diluted earnings per share climbing at a compound annual rate of 9.6%.
The fact that Amex is consistently profitable might be taken for granted. But it supports the argument that this is a high-quality enterprise. And ongoing positive earnings help fund a rising dividend payout.
Amex's valuation
Thanks to the stock's impressive performance this year, its valuation has risen. At the start of the year, shares traded at a price-to-earnings (P/E) ratio of 16.7. As of Dec. 9, the P/E multiple sits at 21.8. Clearly, the market has gotten more enthusiastic toward the company.
The current valuation represents a premium to the trailing three-, five-, and 10-year averages. I can certainly understand why some investors would be hesitant to buy shares. If you prioritize valuation in your decision-making process, perhaps the best course of action is to wait for a pullback. A dollar-cost averaging strategy might also make sense.
However, given the quality of this business, investors who appreciate the positive traits mentioned above might be inclined to buy American Express stock right now.
