Why I Like American Express (AXP) Stock

Of all the Dow stocks, American Express (NYSE: AXP) has taken the biggest beating so far this year. It’s down 20% since January 1st and down over 40% since the all-time high in July 2014.

Management has released weak projections for the next few years, and there is the possibility of further downside risk. American Express missed its earnings prediction for 2015, and the market has shown its wrath. For comparison, Visa (NYSE: V) stock is down 6% this year and MasterCard (NYSE: MA) is down 10%.

For starters, competitors such as Visa and MasterCard will enjoy profits stemming from the debit card segment of the market, while American Express will not. We are rapidly moving to a cashless society (I don’t even remember the last time I used cash) and American Express must get into position to take advantage. This is a make-or-break time for payment systems; new electronic/mobile payment systems hit the market every day, giving people more ways to pay for goods and services. Credit cards still give big profits, but debit cards have huge potential. All they have now are the prepaid cards.

American Express is also going through a restructuring phase. They’ve announced plans to lay off workers and cut costs. Strictly cutting costs can be an effective catalyst for the short-term, but the company will need to do more in the future. One area of focus for them is through the prepaid cards, allowing them to expand among less creditworthy clientele. American Express has historically served wealthier clients, so diving into the prepaid market will give the company room to grow. The company will also address shareholders at its investor day this March 10th, hopefully giving them more information and specific cost-cutting plans.

The market may be freaking out about American Express, but Warren Buffett is staying calm. He recently sent out his annual letter, where he said that American Express is an excellent business with talented management. The Oracle of Omaha has made a fortune by building large positions and holding them for years. American Express currently makes up 8% of his portfolio. Buffett is still their largest shareholder, and if he can sleep at night, so can I.

American Express has a nice dividend, too. It’s currently a little over 2%, while Visa and MasterCard don’t even pay 1%. The P/E ratio is a respectable 11 and the P/B is 2.64, although P/B is a shaky metric for credit card companies. One of my favorite metrics, insider transactions, is also positive. On January 26th, Ronald Williams, the Director of American Express, bought 18,040 shares at a total cost of $1,001,400. This is a glimmer of light after years of insider selling.

The stock now trades around where it was three years ago. There’s so much bad news about the stock that investors have probably pushed it below its intrinsic value. American Express has the potential to be the next big turnaround story if CEO Kenneth Chenault takes the company in the right direction. Besides, all this bad news has a silver lining, since it puts the board under a ton of pressure to make things happen.

Many investors and analysts have given up on American Express. However, when you can’t find anyone willing to buy a particular stock, it means there’s less downward pressure. The path of least resistance is more than likely up. The core of the business (credit cards galore) is still healthy and it generates considerable amounts of cash flow. People are quick to call this stock a value trap, but I call it a value play.

On a more personal note, American Express has the best customer service of any credit card I’ve ever had. When I contact them, I know I can get a prompt, reliable answer from one of their customer service reps. I can’t say that about many other credit card companies. If anything, the human element is another one of their advantages.

Disclosure: The author is currently long AXP stock.