This Warren Buffett Stock Is Soaring Thanks to… Gen Z?!

When someone thinks of a “Warren Buffett” stock, you don’t normally associate it with Generation Z — the generation born after 1997. After all, Buffett turned 91 a few months ago and is mostly known for investments in candy, insurance, and railroads — not cloud software, crypto, and meme stocks.

But one thing Buffett does seek out is durable brands that can stand the test of time. That’s what it looks like he’s found in American Express (NYSE:AXP), which Buffett bought back in the early 1990s. After spending much of the past 30 years positioning itself as a premium brand for well-off clients who like to travel, AmEx’s management appears to have found its stride with the younger generation — and it’s showing up in the company’s financials.

A young man listens to music on headphones while purchasing something online with his credit card.

Image source: Getty Images.

Earnings have impressively roared back sooner than expected

American Express just reported its earnings on Friday, Oct. 22, blowing away analyst estimates. Revenue surged 25%, with earnings per share up a whopping 75% over the past year. The quarter’s $2.27 EPS figure beat analyst estimates by a huge $0.50.

It’s true that AmEx was lapping the second full quarter of the pandemic and therefore had somewhat easy comparisons. Still, American Express’ bent toward travel and leisure, as well as corporate travel, was supposed to keep its earnings power at bay until the pandemic had fully passed. And the emergence of this summer’s delta variant could have thrown a wrench into the recovery.

Yet AmEx’s billed business turned positive versus 2019 levels for the first time since the pandemic. And that’s all the more remarkable considering travel and leisure spending, baby boomer spending, and large enterprise travel spending still lag pre-pandemic levels, by a lot.

So how did American Express outperform?

Pivoting benefits, courting millennials and Gen Z

AmEx’s outperformance came from incredibly strong performance from its millennial and Gen Z cohorts. While this combined group makes up only 27% of AmEx’s consumer spending, millennial and Gen-Z billed business surged 48% year over year and even 38% when compared with 2019. That compares with a 9% increase from Gen X (39% of AmEx’s consumer spending) and a 6% decline from baby boomers (34% of AmEx consumer spending). And that trend looks to continue, as 75% of new Gold and Platinum cards came from millennials and Gen Z last quarter. Overall, Amex increased new card acquisition by 86% to 2.6 million, up from 1.4 million cards acquired in the year-ago quarter.

While American Express may seem like a relic of a former era, but this pivot has been ongoing for a few years, as management has been injecting relevant benefits for younger consumers into its premium cards while also increasing its digital capabilities. For instance, while “buy now, pay later” start-ups have become all the rage this year, American Express has had this capability for its card members since 2017.

But it’s not just the buy now, pay later functions that millennials and Gen Z are drawn to. In fact, Squeri pointed out the younger cohort enjoys travel, experiences, and access to exclusive events even more than the baby boomer generation. That, combined with the addition of digital benefits on streaming and food delivery, are helping bring in the millennials and Gen Z cohorts to the AmEx brand. On the conference call with analysts, Squeri said:

[M]illennials and Gen Zs are about experiences and they’re about access. And I can speak for experience, having a household of them. And so they love to travel. They love to do things. And when you look at the platinum card product, which had always been positioned as, hey, I’m a real high spender. I need to have that platinum card product, you have to look at the utility of this product. And you look at fine hotels and resorts and you look at the value that you get out of a fine hotel and resort booking with an early check-in and a late checkout and a free breakfast and $100 credit at the hotel. And then you look at streaming credits. They’re online shoppers. There’s rewards accelerators. There’s travel credits. There’s access to tickets. There’s access to special card member events. It is a range of services that they use. … So when they look at this product, it really is a lifestyle product for them, one that ranges from their everyday activities of online spending and streaming, all the way to traveling and the credits they get.

Keeping the brand relevant

While many card companies pulled back during the pandemic, AmEx lavished new rewards into its premium cards to retain those valuable customers, while attracting new customers seeking relevant discounts in the stay-at-home economy while racking up points to use on a future tip. Those efforts appear to be paying off.

In fact, with the rewards usage it’s seeing, management now sees the opportunity to raise fees, recently hiking its high-end Platinum Card fee 25% from $550 per year to $695. That’s quite a bit of pricing power right there, and an important part of American Express’ financials. While spending patterns and credit quality can fluctuate with the economy, as we saw during the pandemic last year, annual card fees tend to be steadier and more subscription-like. In fact, card fees were the only revenue segment that increased for American Express during the pandemic, growing 15% in 2020. In the third quarter, card fees were up 27% versus 2019, making up 12% of AmEx’s revenue. But remember, this is before the recent fee increase.

American Express was able to pivot its brand impressively to do right by its customers during the pandemic. Now, the company appears stronger, and with a more diverse customer base, than it was just a few years ago. When travel, leisure, and business travel fully return, AmEx will get back to full strength, but with an even broader business coming out of the pandemic than when it went in. Kudos to AmEx’s management team for their pandemic performance; those management decisions made in 2020 should benefit shareholders for years to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Warren Buffett Loves These Stocks. Are They Right for You? | Personal Finance

A large chunk of American Express’ money comes from the merchant fees it charges when consumers swipe their cards at vendors around the world. Those fees are generally expressed as a percentage of the swipe amount, which means as prices rise, so does the money that American Express collects. That gives it an incredible ability to organically keep up with inflation over time.

The company trades at around 20 times its trailing earnings, which is a bit of a discount when compared to the overall S&P 500. In addition, American Express is such a big player in the business travel market that it’s poised to do well as pandemic restrictions ease and travel picks back up. That gives good reason to believe its earnings growth could see a one-time boost from that recovery.

While Buffett got in big because of a short-term scandal, American Express’ long term business model is probably why he has held on to its shares for so long. That model looks well positioned to handle both inflation and a return to business travel. Add a relatively reasonable valuation to the mix, and it could be worth considering today.

No. 3: Imagine working through the pandemic without its services

Buffett’s company owns a whopping 158 million shares of telecommunications giant Verizon (NYSE: VZ). Originally part of the Bell Telephone System, Verizon emerged a strong player from the breakup of that behemoth. Now known more for its wireless and broadband services than that legacy wired phone service, the company has certainly evolved over time to keep up with changes in the industry.

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Buffett praises East Tennessee entrepreneurs behind two of his businesses

In his annual letter to shareholders released over the weekend, one of the world’s richest men praised the East Tennessee entrepreneurs behind two of his major business acquisitions.

Warren Buffett, chairman of Berkshire Hathaway, said Clayton Homes which Berkshire acquired for $1.7 billion in 2003 and Pilot Travel Center which Buffett’s investment group plans to buy an 80% share of by 2023, are both generating annual pre-tax earnings of more than $1 billion.

“Each company was started by a young man who had graduated from the University of Tennessee and stayed put in Knoxville,” Buffett said in saluting the entrepreneurs behind the multi-billion-dollar Knoxville companies. “Neither had a meaningful amount of capital nor wealthy parents. Jim Clayton, after several other business ventures, founded Clayton Homes on a shoestring in 1956, and “Big Jim” Haslam started what became Pilot Travel Centers in 1958 by purchasing a service station for $6,000.”

In 2020, Clayton Homes revenues jumped 17.1% to $8.6 billion and pre-tax earnings rose 13.9% to $1.25 billion “driven by increases in units sold and revenue per home sold,” Berkshire Hathaway said in its annual report.

In 2018, Buffett’s Berkshire Hathaway paid $2.76 billion for an initial 38.6% stake in Pilot Travel Centers, according to insurance filings. The Haslam family plans to maintain a 10% ownership share in Pilot, the nation’s biggest chain of truck stops in the country. Berkshire Hathaway did not break down results for Pilot in its financial filings released Saturday.

The Knoxville businesses are among the diverse businesses in Berkshire’s portfolio and each is now headed by the son of the company founders — Jimmy Haslam at Pilot Travel Center and Kevin Clayton at Clayton Homes.

“Each of the men later brought into the business a son with the same passion, values and brains as his father,” Buffett said. “Sometimes there is a magic to genes.”

Jim Haslam, now 90, has recently authored an inspirational book about his career in which he relates how Jim Clayton’s son, Kevin, encouraged the Haslams to sell a large portion of Pilot to Berkshire.

Big Jim Haslam is the father of former Tennessee Gov. Bill Haslam, who is now a visiting professor of political science at Vanderbilt University. A 2015 Forbes article estimated Bill Haslam’s net worth at $2 billion, making him the nation’s wealthiest elected official at that time.

“When you next fly over Knoxville.. tip your hat to the Claytons and Haslams as well as to the army of successful entrepreneurs who populate every part of our country,” Buffett said.

Berkshire Hathaway also owns Shaw Industries, the Dalton, Georgia-based carpet giant which has 20,806 employees who produce carpets, tiles and other floorcoverings around the globe. Berkshire acquired Shaw Industries in 2000 for $2.1 billion.

Shaw is part of Berkshire’s building products division, which recorded a 4.5% increase in revenues to $21.2 billion last year and had an 8.4% gain in pretax earnings to nearly $1.4 billion.

Overall, Berkshire reported Saturday that its earnings in 2020 dropped by 48% to $45.2 billion. While the pandemic hurt many of its business lines — and forced Berkshire to again stage its forthcoming annual meeting as an online-only event, this time in Los Angeles — its profits rose 23% in the fourth quarter, as its stock investments were bolstered by soaring markets.

Among the biggest winners in Berkshire’s vast investment portfolio was its 5.4% stake in Apple, whose shares have been among the top market winners over the past year. In his annual letter to investors that accompanied the company’s financial results, Buffett noted that the iPhone maker was now one of his company’s three biggest assets, with its stake worth $120 billion as of Dec. 31. (Berkshire calculates that it paid $31 billion for its holdings.)

— Compiled by Dave Flessner who may be reached at or at 757-6340

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