Is it worth buying an American Express card while it’s worth less than $300?

American Express (NYSE:AXP) this year is on a roll. The stock is up nearly 60% without much stress. The stock has fallen 10% or more only once since last fall. It seems like a matter of time before the stock hits $300.

There are potential obstacles, however. Personal savings rates among American consumers are at their lowest in a decade, and total credit card debt in America is at an all-time high. In other words, people are financially drained.

Should investors follow the momentum and buy the stock today? Is American Express poised for disappointment?

What recession?

Various consumer companies reported weaker expenses in their midyear earnings, but American Express is not feeling the pain. The company reported solid fundamentals in its second-quarter report. Net income rose 8% year over year in the second quarter, driven by a 6% increase in billed transactions.

Economic growth has slowed in the years following COVID-19, which is understandable. The stimulus money that fueled the economy (and inflation) has dried up. But I would argue that an 8% increase in revenues is gratifying at a time when people are balking at higher prices in places like McDonald’s.

Image source: American Express.

Perhaps more important than people spending money, American Express customers are paying their bills. As you can see above, late payments and defaults are lower than they were before the pandemic.

It’s important to keep an eye on this going forward. For now, it looks like economic pressures aren’t affecting American Express. Its credit card is generally seen as a premium brand, so it could do better than typical lenders in a recession.

Solid growth ahead

American Express and its shareholders could enjoy solid growth over the next few years if spending remains resilient. Analysts agree that the company’s revenue will grow 8% to 9% annually from this year through 2026.

The company also raised its full-year Q2 earnings per share (EPS) guidance from a range of $12.65-$13.15 to a range of $13.30-$13.80. That’s a 23% year-over-year increase. Analysts expect the company to grow earnings by an average of 15% annually over the next three to five years.

Given the rumors of a looming recession, the economy could still drag American Express down. However, management noted on the company’s second-quarter earnings call that its core business comfortably supports 15% earnings growth, even in what management described as a slower-growth environment. All bets are off in a severe economic downturn, but it signals confidence in American Express’ business momentum.

Should investors buy stocks?

American Express stock appears reasonably priced, even after a 60% share rally. The stock is trading at 18 times management’s updated earnings forecast, in line with American Express’s average price-to-earnings ratio over the past decade.

The stock pays a dividend of 1.1%, so the stock could generate annual total returns of around 16% over the next few years if it meets expectations and maintains its current valuation. Assume the U.S. enters a mild recession. Cutting earnings growth in half from the estimated 15% would still give the stock a chance to generate high-single-digit annual returns.

This makes American Express a solid stock to own today, even as it approaches $300 per share. Investors can still make money on the stock if they are willing to hold on to it through what should be multiple years of double-digit earnings growth.

Again, all of this changes when an economic downturn hits. A major recession could wipe out American Express’s earnings growth and hurt the stock. However, it’s virtually impossible to predict events like 2008-09 or 2020. Lending is part of American Express’ business model, so you’ll never completely avoid that risk. Instead, diversify your portfolio to protect yourself from the risks of investing in lenders like American Express.

Regardless of how the economy develops in the near future, American Express has been around since the mid-19th century and will likely be around for many years to come.

Is it worth investing $1,000 in American Express right now?

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American Express is an advertising partner of The Ascent, a Motley Fool company. Justin Pope has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.