Warren Buffett is sticking with American Express, and so am I

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American Express (NYSE: AXP) has been one of Warren Buffett-led Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) stock holdings for some time, but its performance lately hasn't been stellar. Even after a recent rebound, shares are down nearly 20% over the past year as a result of losing its Costco partnership and a few other negative developments. However, Buffett defended his Amex investment at Berkshire's annual meeting, and I think he's got a good point.

AXP Chart

American Express' troubles

The biggest reason for American Express' decline is the loss of its relationship with Costco, which made up about 8% of Amex's total card spending in 2015. In addition, AmEx's co-branding deals with JetBlue and Fidelity ended, and although this was a much smaller piece of the company's revenue, it's still a significant setback. There's also the looming threat of losing the Starwood Hotels partnership, as well, once the hotel company is acquired by Marriott, which has a co-branding deal with Chase.

Competition in the credit card business has never been higher. Banks are offering unprecedented introductory bonuses and 0% APR deals to attract customers, and this could create a problem for AmEx, which will have to offer its own attractive incentives (read: "spend more money"), thereby cutting into its profits.

Buffett still loves American Express

American Express is one of Berkshire's "big four" stock investments, and the company's stake now represents 16% of the credit card giant.

At Berkshire's annual meeting in late April, Buffett said American Express' business model is "under attack," although it's not enough to get him to sell. He called American Express an attractive business and said he is happy with the company and still likes the stock as an investment.

Buffett has repeatedly praised American Express' talented, shareholder-friendly managers, who return tons of cash to investors in the form of dividends and buybacks. I really can't stress enough the value Buffett places on great management -- he believes the right management team can add billions to a company's intrinsic value. Buffett also loves AmEx's rock-solid brand and ability to generate cash.

A great value and a durable competitive advantage

Admittedly, it will take some time to replace the Costco revenue, but the company plans to trim expenses by about $1 billion this year to help make up the difference.

Additionally, AmEx has had some interesting positive developments lately, including a deal with Sam's Club to start accepting the company's cards. AmEx is increasing its product offerings and pushing for more merchants to accept its cards, hoping to be as universally accepted as Visa and MasterCard products by 2019. AmEx has increased its marketing and promotions spending by 19% during the first quarter, so it's not taking its challenges lightly.

Results are promising so far. During the first quarter of 2016 the company increased its number of issued cards by three million, and increased revenue by 4% on a constant-currency basis. And, when you exclude the Costco and JetBlue portions of the portfolio, AmEx's loan portfolio actually grew by 11% over the past year.

American Express has the competitive advantage of a strong brand and an affluent, attractive group of cardholders, which allows it to charge merchants more for payment processing than rivals Visa and MasterCard. In fact, one report found that AmEx cardholders spend an average of 71% and 60% more than Visa and MasterCard customers, respectively. And, AmEx's widespread closed-loop network allows it to consistently deliver a return on equity in the 25% range.

AXP Return on Equity (TTM) Chart

Also, there is the global trend toward a cashless society, which benefits the entire payment processing sector.

Stick with AmEx

The bottom line is that although revenue will certainly suffer in the short term, American Express is likely still a long-term winner, and I believe investors with the stomach to make it through the in-between time will be handsomely rewarded.

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Matthew Frankel owns shares of American Express, Apple, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Costco Wholesale, Facebook, Marriott International, MasterCard, and Visa. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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RELATED: Warren Buffett through the years
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Warren Buffett through the years
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Warren Buffett through the years
Warren Buffett speaks to the media during a press conference Monday, June 26, 2006 in New York. Buffet, the chairman of Berkshire Hathaway, recently announced his intention of giving 10 million shares of his company to charitable organizations, the majority going to the Bill and Melinda Gates Foundation. (AP Photo/Seth Wenig)
NEW YORK, UNITED STATES: California Governor Arnold Schwarzenegger (L) cofers with billionaire investor Warren Buffet (R) during a meeting with Wall Street investors at the Ritz Carlton hotel February 25, 2004 in New York City. AFP PHOTO/POOL/Kathy WILLENS (Photo credit should read KATHY WILLENS/AFP/Getty Images)
Investor Warren Buffet participates in the Treasury Conference on U.S. Capital Markets Competitiveness, Tuesday, March 13, 2007, at Georgetown University in Washington. (AP Photo/Gerald Herbert)
CLEVELAND - MARCH 25: Philanthropist Warren Buffet (C) wears a LeBron James Witness tee-shirt as he cheers for the Cleveland Cavaliers during a game against the Denver Nuggets March 25, 2007 at The Quicken Loans Arena in Cleveland, Ohio. NOTE TO USER: User expressly acknowledges and agrees that, by downloading and/or using this Photograph, user is consenting to the terms and conditions of the Getty Images License Agreement. Mandatory Copyright Notice: Copyright 2007 NBAE (Photo by David Liam Kyle/NBAE via Getty Images)
** FILE ** In this May 21, 2008 file photo, U.S. Billionaire investor Warren Buffet speaks during a news conference in Madrid. Buffett's Berkshire Hathaway Inc. is investing at least $5 billion in Goldman Sachs Group Inc., Goldman announced Tuesday, Sept. 23, 2008. (AP Photo/Paul White, file)
Warren Buffet, chairman of Bershire Hathaway, arrives for the annual Allen & Co.'s media conference Wednesday, July 9, 2008, in Sun Valley, Idaho. (AP Photo/Douglas C. Pizac)
FILE - In this May 2, 2009 file photo, Warren Buffett, CEO of Berkshire Hathaway, right, waves to shareholders prior to the annual Berkshire Hathaway shareholders meeting in Omaha, Neb. Warren Buffet's Berkshire Hathaway said Tuesday, Nov. 3, 2009, it has agreed to buy Burlington Northern Santa Fe in a deal valuing the railroad at $34 billion.(AP Photo/Nati Harnik, file)
Warren Buffet heads to lunch after a morning session at the Sun Valley Inn for the 2011 Allen and Co. Sun Valley Conference, Thursday, July 7, 2011, in Sun Valley, Idaho. (AP Photo/Julie Jacobson)
Warren Buffett is interviewed in the White House Briefing Room in Washington, Monday, July 18, 2011, following his meeting with President Barack Obama. Obama met with members of the Giving Pledge including, Buffett and Bill and Melinda Gates, and others to receive and update on the program. (AP Photo/Pablo Martinez Monsivais)
Billionaire investor Warren Buffet at the Allen & Company Sun Valley Conference in Sun Valley, Idaho, Friday, July 13, 2012. (AP Photo/Paul Sakuma)
Warren Buffett, chairman of Berkshire Hathaway Inc., right, speaks to David Rubenstein, co-founder and managing director of the Carlyle Group, during the Economic Club of Washington dinner event in Washington, D.C., U.S., on Tuesday, June 5, 2012. Buffett said he doesn't expect another U.S. recession unless Europe's crisis spreads. Photographer: Andrew Harrer/Bloomberg via Getty Images
DETROIT, MI - SEPTEMBER 18: Billionaire investor Warren Buffett speaks at an event called, 'Detroit Homecoming' September 18, 2014 in Detroit, Michigan. The purpose of the invitation-only event of Detroit expatriats is to give the group a chance to reconnect, reinvest and reinvent with their hometown. The topic of Buffet's conversation was, 'Why I'm Bullish on Detroit.' (Photo by Bill Pugliano/Getty Images)
Warren E. Buffett, Chairman of the Board and Chief Executive Officer, Berkshire Hathaway Inc., participates in a NADA Automotive forum happening in conjunction with the New York International Auto Show, Tuesday, March 31, 2015, in New York. (AP Photo/Mary Altaffer)
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