Key Points
- Buffett sold numerous banks during the beginning of the pandemic.
- One smart decision he made was to maintain Berkshire Hathaway’s large stake in American Express.
- The stock now trades at all-time highs and the business appears well-positioned for long-term growth.
Not as easy as it looks
While the decision looks like a no-brainer now, I view Buffett’s decision to maintain Berkshire’s stake in American Express as another reason why he is one of the greatest investors of all time. In the early months of the pandemic, no one knew what was going to happen with the economy. A recession came suddenly, and banks braced for massive amounts of loan losses as people limited physical interaction and the economy more or less came to a screeching halt for weeks and even months at a time.
IMAGE SOURCE: THE MOTLEY FOOL.
At this point, Buffett decided to get more selective about which banks he maintained in Berkshire’s portfolio because he didn’t like the amount of exposure the company had to the sector. Credit card debt in particular tends to experience higher loan losses than other loan categories because consumers are less likely to pay debt when they run into financial trouble. Following the Great Recession, credit card loan charge-offs, which measures probable losses as a percentage of the overall loan book, jumped to a whopping 11%.
Furthermore, prior to the pandemic, about one-third of American Express’ billed business — which represents spending on American Express credit cards — came from the travel and entertainment sectors, industries that still haven’t fully recovered from the pandemic.
But American Express has long been a top position in Buffett’s portfolio. Berkshire currently holds 151.6 million shares, making American Express the conglomerate’s third-largest holding in Berkshire’s equity portfolio. Clearly, Buffett had all the faith in the world in the brand that American Express has built over time, as well as in CEO Steve Squeri and the rest of senior management to guide the company through the pandemic.
Amex is flying
Buffett’s conviction regarding American Express is now paying off nicely. The stock recently closed at $194 per share, an all-time high. The valuation on a price-to-tangible book value basis, which looks at a company’s market cap relative to its value if it was liquidated, is a massive 670%. That’s well more than double the valuation that any of the other big credit card companies like Discover Financial Services, Synchrony Financial, and Capital One trade at.
American Express also appears to be coming out of the pandemic in better shape than when it entered. Loan growth finally seems to be returning, and ending loan balances at American Express jumped more than 15% in the fourth quarter. While total network volume has recovered to pre-pandemic levels, billed business in travel and entertainment in the fourth quarter of 2021 was only at 82% of the volumes seen in the fourth quarter of 2019. This should continue to recover as the pandemic hopefully continues to trend toward an endemic and people start traveling again. In fact, you could see spending in this segment surge if there is pent-up demand to travel.
Lastly, American Express has increased its earnings per share (EPS) and revenue growth projections to levels that are larger than what the company had envisioned prior to the pandemic. In 2022, American Express expects to generate EPS of $9.25 to $9.65 on revenue that is expected to grow 18% to 20% from the $42.4 billion the company did in 2021. EPS is actually expected to come in lower than the more than $10 of EPS American Express did this year, but that’s because of one-time events like releasing reserves previously stored away from loan losses that helps to juice earnings.
For 2024 and beyond, American Express expects to be able to grow EPS in the mid-teen percentages and revenue by more than 10%. Prior to the pandemic, management typically guided for revenue growth of 8% to 10% and double-digit EPS growth.
What we can learn from Buffett
Sticking with American Express was likely not an easy decision for most investors during the pandemic, given the high level of charge-offs the credit card business can experience during a downturn, and how travel and entertainment were affected. But for Buffett, the decision probably was pretty easy because of the high conviction he had in the stock, his knowledge of the company, and his faith in management’s ability to steer the company to success over a long-term horizon. Buffett’s decision to hold onto American Express during the pandemic is something all investors can learn from.
