Two famous Warren Buffett quotes encapsulate the philosophy of value investing. I think they also capture the legendary investor’s likely thought process when he first invested in American Express (NYSE:AXP). He said: “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” And he also said: “Be fearful when others are greedy and greedy when others are fearful”
Salad oil scandal
His initial investment in American Express was born out of a 1960s scandal. A salad oil company took out large loans using its product inventory as collateral. However, it filled up its oil tanks with sea water, deceiving lenders, including American Express.
AmEx shares plummeted on news that it had been conned into lending $175m+. In fact many investors feared this would be the end of the company. Not Warren Buffett though. While others were fearful, he snapped up shares in what he saw as a wonderful business. His initial investment totalled roughly $1.3bn and it prove to be both a lucrative and defining investment for the Oracle of Omaha.
Today, his holding company Berkshire Hathaway owns 19% of American Express. Amex is its third biggest holding, only behind Apple and Bank of America. And impressively, he’s made around 20 times his money on the investment, excluding dividends.
Still a wonderful company at a fair price?
AmEx’s popular credit cards and reward schemes are seen as high-status. Its competitive advantage gives the company pricing power, of which it has recently taken advantage, raising annual fees for its platinum credit card.
Buffett has invested in competitors Visa and Mastercard but notably trimmed his positions in both payment giants this year. Both have seen their share prices fall around 10% year to date while AmEx has risen over 28%. Yet despite this strong 2021 performance, the Omicron variant has triggered a sell-off and the stock is 17.5% down from its October highs. That’s unsurprising given that much of its revenue and many rewards have travel links. Therefore any travel restrictions could trigger further slumps in the share price.
But travel aside, AmEx makes the bulk of its revenue, like other card operators, by taking small percentages of every transaction where one of its cards is used. This makes the company a potential inflation hedge as its revenue should rise in line with price increases.
When compared to its major competitors, AmEx looks to be trading at a fair and arguably cheap price. Its price-to-earnings (P/E) ratio stands at 16 compared to between 39 and 40 for Visa and Mastercard. Its P/E is also considerably lower than that of the S&P 500 at 28.5. Additionally, American Express yields an attractive 1.1% which is considerably higher than its credit card rivals.
Warren Buffett isn’t selling. Should I buy?
AmEx is certainly not trading at the wonderful price Warren Buffet paid in the early 1960s. What’s more, if Covid and its variants prove to be travel and general spending suppressants beyond the short term, the AmEx share price could head further downwards. But unfavourable market conditions may present an opportunity for me to add discounted AmEx shares to my portfolio. Ultimately, I make investments with a long-term horizon and I’d be more than happy to add this Warren Buffett favourite to my portfolio before the end of the year. Especially if investors continue to be fearful.
