American Express Stock Dips. Time to Buy?

Credit card stocks and shares of banks that lend to credit card users took a hit on Monday after President Donald Trump discussed plans to cap credit card interest rates. Shares of American Express (NYSE: AXP) declined approximately 4% on Monday, and the stock continued to fall (albeit only slightly) on Tuesday.

It's easy to see why the market reacted negatively to the news. Credit card interest rates are a major part of the economics for many card issuers. Put a hard ceiling on those rates, and investors immediately start asking what that would do to profits.

However, a lot is still unknown about what a rate cap would look like in practice -- and whether it would actually be implemented. Meanwhile, American Express's underlying business has been performing well. So, this begs the question: Is this an opportunity to be "greedy when others are fearful," as famed investor Warren Buffett has advised at times? Or is this a real risk that alters the risk profile of the stock until investors have more information?

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What we know (and what we don't)

Trump's comments centered on a proposed cap of 10% on credit card interest rates for one year. Adding to the urgency of the situation, he also said he plans to roll out the cap by Jan. 20.

Notably, American Express is both a payment network and a lender, so the integrated payments company would be particularly vulnerable to a new policy like this. Still, it's worth emphasizing that American Express is not a pure-play interest-income story either; a large part of its business is built on payments and fees. When one of its card members uses an Amex card, the company collects a fee from the merchant. American Express calls this "discount revenue" -- and it's the company's biggest driver of its total revenue. Additionally, the company generates revenue from membership fees, or annual credit card fees its members pay in exchange for perks. Net interest income accounted for about one-fourth of the company's third-quarter revenue.

Of course, line items on American Express's income statement other than net interest income would likely also be affected by a one-year 10% interest rate cap. For instance, credit card companies would likely be forced to lower the credit limits on cards for higher-risk borrowers if they can no longer charge higher rates to be compensated for the risk of lending to that consumer. This would result in lower card member spending and, consequently, lower discount revenue.

Overall, a 10% cap on credit card interest rates would almost undoubtedly have a substantially negative effect on American Express's business.

For these reasons, I think I wouldn't buy shares in the stock until there is more clarity about this proposed policy change.

A strong business

With this said, if shares fall even further, there will likely be a point at which the stock becomes attractive, even with a dark cloud of potential policy changes hanging over it. After all, the business is firing on all cylinders.

Capturing its strong momentum, American Express's third-quarter revenue rose 11% year over year to a record $18.4 billion, and earnings per share rose 19% to $4.14.

While discount revenue in the quarter rose 7% year over year to $9.4 billion, net card fee revenue rose even faster, climbing 18% year over year to about $2.6 billion. And net interest income increased 12% year over year to $4.5 billion.

Additionally, the American Express consumer looks strong. The company said card member spending growth accelerated to 9% year over year, helped by both new account acquisitions and growth in spending from existing card members. Additionally, the company maintained a low net write-off rate of 1.9% -- flat compared to the prior year.

Time to buy?

With a business this strong, buying on the dip might make sense. However, given the potential detrimental impact of such a cap on American Express, investors may want to demand a lower price before proceeding, taking into account the increased uncertainty surrounding the stock. While it's unlikely shares will get this low, a price of around $300 would do a better job of pricing in some of the new uncertainty now looming over the credit card industry. On the other hand, if shares remain at their current valuation but the Trump administration decides not to follow through with these plans after all, this could be a good buying opportunity.

For now, investors should closely monitor this development, as it could have a significant impact on credit card companies and banks that lend to credit card users.

American Express is an advertising partner of Motley Fool Money. Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.