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5 Reasons to Buy American Express Now

Stocks in this article: BAC AXP C WFC JPM COF DFS

NEW YORK ( TheStreet) -- American Express (AXP) remains a fantastic pick for long-term investors, as the company consistently generates stellar returns on equity and returns the majority of generated capital to investors.

Even with a sequential decline in earnings for the third quarter, American Express delivered year-over-year revenue growth of 9% and a stellar 27.8% return on average equity, increasing from 25.9% a year earlier.

The shares closed at $48.46 Friday, returning 15% year-to-date. While it's not a fair comparison, the KBW Bank index has dropped 34% year-to-date.

American Express CEO Kenneth I. Chenault

So why go in now? American Express's shares trade for 3.7 times their Sept. 30 tangible book value of $11.99, according to SNL Financial. That seems mighty pricey when compared to names like Bank of America (BAC) and Citigroup (C), which trade well below tangible book value.

American Express is also more expensive relative to forward earnings than the best-known traditional U.S. banking names, with shares trading for 11.5 times the consensus 2012 earnings estimate of $4.22 among analysts polled by FactSet, while Wells Fargo (WFC) is the most expensive of the "big four" U.S. banks, trading for just over eight times forward earnings, Citigroup and JPMorgan Chase (JPM) trade just under seven times consensus 2012 earnings estimates, and Bank of America trades for just over six times forward earnings.

The market values American Express is often compared to traditional banks because the company has been such a consistently strong earner through thick and thin, and because of the support provided for the shares through a steady return of capital to investors, mainly through share buybacks.

And looking back to the beginning of the U.S. credit crisis, shares of American Express consistently traded over 20 times earnings.

After the company reported third-quarter earnings of $1.2 billion, or $1.03 a share, increasing from $1.1 billion, or 90 cents a share, a year earlier, Guggenheim Securities analyst David Darst reiterated his "Buy" rating for American Express, with a $56 price target, saying that the company's "business model differs from that of other primary card brands in that AXP spans from payment issuer to merchant acquirer in a closed loop network," and that the company is "unique relative to other bank holding companies given its revenue mix, which is primarily fee income driven," while the banks depend on interest-rate spreads.

Darst also described American Express as "an income statement driven company rather than balance sheet driven," and that "fee income accounts for more than 80% of total revenue."

Over the short term, investors could well see outsized gains on heavily discounted names like Bank of America and Citigroup, but American Express shines as a long-term quality play.

Here are 5 reasons to buy American Express now:

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