Berkshire Hathaway's stake in American Express
Berkshire Hathaway (BRK.A, BRK.B) is the largest institutional owner in American Express (NYSE:AXP). It owns 156,610,700 shares which is 13.00% of Amex's total shares. It accounts for 11.65% of Berkshire's assets. It bought this stake in August 8th 2005 and it has not sold off any of its original stake.
So are Berkshire Hathaway and Warren Buffett right to hold onto Amex?
American Express certainly seems to be well-positioned in the main sector it operates in. It is the largest supplier of credit cards, and 24% of all credit card transactions are conducted using Amex cards. As consumers globally increasingly switch from cash to credit cards and electronic forms of payment, Amex is poised to benefit from the long-term growth of the market.
Also, American Express has done well to combat any loss of market share from the advent of Near Field Communication. It developed the ExpressPay system which allows all Amex credit cards to participate in contactless transactions by communicating with a receiver. No pin is necessary, and the card does not need to be swiped. The major corporations which use credit cards the most have already embraced ExpressPay. CVS (NYSE:CVS), Best Buy (NYSE:BBY), and McDonald's (NYSE:MCD) are just a few of the companies that have implemented the technology in their stores. Therefore, Amex is better positioned than some of its competitors to stave off the rise of NCF technology.
American Express has also benefited recently from achieving cost saving by re-engineering to cut out some of the waste from the company. This will enable it in the future to create higher profit margins which it can subsequently spend on expanding and offering better deals to customers, attracting a stronger consumer base.
Amex's brand is also an incredibly important part of the company. According to BusinessWeek, American Express has the 22nd most valuable brand with a value of $14.97 billion. Furthermore, Fortune listed Amex as one of the 20 most admired companies in the world. This highly regarded position puts the company in a good position to expand in the future while retaining a loyal consumer base. Therefore, prospective investors should not worry overly much about American Express losing some of its market share to competitors, as it seems like it has a very strong consumer base.
American Express is unfortunately rather exposed to the macro economy in two different ways. First off, as a result of the recession, many credit card customers still carry a great deal of debt and are building on this debt. There is a continuing concern that they will not be able to pay back this debt, which will hurt Amex's bottom line if it comes to fruition. Secondly, American Express generates a great deal of its revenues from companies and wealthy individuals. A slowdown in the global economy disrupts this growth as spending from these entities decreases.
The other risk Amex faces is growing government regulation. The US government is coming under increasing pressure to put an end to the risky loans companies like American Express have been engaging in. This will hurt the company's bottom line, as its high interest loans can be some of its most profitable sources of income. However, it is worth remembering that possibly some regulation might be good for the company, as many of the credit card companies have recorded huge losses off some customers who are unable to repay the debt they have accumulated.
Overall, I believe it is a hold, perhaps even a moderate buy, but I invite you to draw your own conclusions. Whatever the case, I believe that The Oracle of Omaha is right in this climate to hold onto American Express, at least for the near future. American Express still holds a substantial market share in electronic spending, which looks set for continued growth, and this will continue to provide a safe base in the years to come.
Disclosure: I am long AXP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.