American Express: A Creditable Investment - Barron's

American Express (AXP), the credit card firm recently approved to be a bank holding company, has seen its shares plummet this year as the credit crisis rages on and the economy grows weaker. The markets may have overreacted, says Barron's Andrew Bary. AmEx should have enough liquidity to see it through even a tough 2009, and will likely be solidly profitable next year. If the company can successfully navigate the financial crisis, its shares could jump 50% by the end of 2009.

AmEx shares are down 61% this year, bringing the stock back to 1997 levels. Much of the drop has come since September, as investors worry about AmEx's reliance on credit-markets funding, growing losses on its credit card loan portfolio and a drop in global consumer spending. Though the concerns are legitimate, they have been overblown.

For starters, the company has a vote of confidence from Warren Buffett's Berkshire Hathaway (BRK.A) which holds 13% of AmEx shares and is the company's largest stockholder. AmEx is relatively well capitalized compared to other major banks and brokerages. Having been approved to become a bank-holding company, it's possible AmEx could merge with a bank in the next year to quickly reach its goal of getting a significant amount of funding from deposits. The company has also reportedly applied for $3.5B of capital through the Treasury's TARP program.

If the TARP money doesn't come through, or if the company's financial position unexpectedly deteriorates, Barron's believes Buffett would be willing to pump several billion dollars into the company or that Berkshire Hathaway might possible buy the company outright. With AmEx's current market value at $23B, it could easily be acquired by Berkshire and its $155B market value.

So far this year, AmEx has earned a 27% return on equity. If the company looks close to earning anywhere near its 2010 target of 30%-plus return on equity, the stock could go up to $30/share. Profit will likely fall next year, from an estimated $2.59/share this year to Wall Street consensus of $2.50/share next year. Barron's thinks 2009 EPS could go even lower, to $2.00/share. Even under the grim forecasts of Barclays Capital's Bruce Harting, who cut his 2009 estimate to $1.60 from $2.25, the company will remain profitable.

Vitaliy Katsenelson, of Investment Management Associates, argues AmEx's access to a government safety net removes a key risk: funding. AmEx had previously relied on commercial paper and securitization of credit-card loans, two markets that are now difficult to access. AmEx says it can refinance $24B in debt maturing this year, but its access to government funds as a back-up should reassure worried investors.

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• American Express has announced plans to cut 7,000 jobs, or nearly 10% of its workforce, as part of a cost-cutting push that could save the firm up to $1.8B next year.
• According to Ockham Research, American Express is undervalued by historical norms but remains a risky bet. Ockham thinks credit card defaults will continue for several quarters, hurting AmEx's bottom line, and thinks it should give investors pause that the company is turning to the government for help.

Comments

[D-D:]

One thing to watch out for is that as more people get laid off, there will be an increased number outstanding bills to be paid to Amex. If the job market stabilizes, I would feel comfortable with the contents of this article

2008 Nov 17 01:19 PM