Key Points
American Express stock dropped after its first-quarter earnings.
Bank of America stock has been rising during the past month.
Which of these two financial stocks is the better buy?
It's April and that means the start of another earnings season. More specifically, banks and financial institutions usually are the first to report earnings each quarter, so we have a chance to look them over now.
Two of the bigger names in banking and financials are American Express(NYSE: AXP) and Bank of America(NYSE: BAC). Bank of America is the nation's second-largest bank, while American Express, the third-largest credit card company, is also a bank.
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These two financial stocks are relatively cheap right now and have been long-term powerhouses in their markets. Are there investment opportunities with either of these stocks?
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If so, which one is the better buy -- American Express or Bank of America?
American Express
American Express needs no introduction; you may have one of its cards in your wallet. But, as far as its closed loop business model goes, it is not like Visa or Mastercard. It is a bank, unlike the other credit card and payment processing giants, so it serves as the card issuer, the payment lender, and the network all in one -- a self-contained system. So, it not only earns income on swipe fees and membership fees, but also on interest income from the loans it makes.
American Express stock took fell 4% last week after it reported first-quarter earnings. American Express beat estimates on the top and bottom lines and saw an 11% increase in revenue and an 18% jump in earnings per share, year over year.
It's hard to know exactly why investors do what they do, but the downturn may have been due to increased spending on marketing and technology upgrades, which investors likely took as forgoing short-term gains for long-term investments. That's evident because American Express didn't increase its earning or revenue forecasts after a strong quarter.
To me, the downturn only makes American Express a better buy. The shares have declined about 15% this year and trade at just 18 times forward earnings, which is squarely in the buy zone. I wouldn't be shocked to see American Express bounce off this dip.
Bank of America
Bank of America stock is down about 5% year to date, but during the past month it has had some momentum, rising about 10%.
The gains have been fueled by strong first-quarter earnings, with revenue rising 7% and earnings per share surging 25%. Net interest income, a key indicator of loan health, jumped 9%, while investment banking revenue increased 21%, driven by a strong quarter for mergers and acquisitions.
In addition, Bank of America's credit quality improved, with provisions for credit losses and net charge-offs for uncollectible loans decreasing in the quarter. It also improved its efficiency ratio by 170 basis points to 61% -- that means it spends less to make a dollar of revenue.
Further, Bank of America raised its projections for net interest income, now expecting 6% to 8% growth amid expectations for no interest rate cuts in 2026. High interest rates mean high interest expenses.
Which stock is the better buy?
Bank of America stock is also very cheap right now, trading at just 12 times forward earnings. Also, it has a five-year price/earnings-to-growth (PEG) ratio ratio of 0.95 -- a figure of less than 1 suggests a stock is undervalued relative to its earnings expectations.
Which of these stocks is the better buy? Wall Street is slightly more bullish on Bank of America, with 81% of analysts recommending a buy with a median price target of $61 per share. That would indicate 17% upside.
Only 45% of analysts rate American Express a buy with a median price target of $360 per share, which would be a 15% gain during the next 12 months.
I think they're both buys right now, but I'd favor American Express. It has been a more consistent performer in the past, especially in downturns, because it caters to a wealthier clientele. Also, the stock is on a dip right now and at its lowest valuation in a year, so it's a particularly good time to buy.
But overall, you can't go wrong with either. Both Bank of America and American Express are among the top five-largest holdings of Berkshire Hathaway; can you really be too far off with two of Warren Buffett's favorite stocks?
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Bank of America is an advertising partner of Motley Fool Money. American Express is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool has a disclosure policy.
