AmEx Shares Could Double - Barron's

Just two weeks after a bullish article on Visa (V), Barron's cover story this week extols the virtues of American Express (AXP) - suggesting shares could "at least double" over the next year or two.

American Express is in better shape than investors think. Under CEO Ken Chenault, it boasts a premier brand, lots of liquidity and a less risky business model than competitors. Getting a grip on defaults.

Much of the concern over AmEx stems from a sudden surge in loan charge-offs, far more severe than that of its rivals. To wit, in February, AmEx's charge-offs were 9.31% vs. an industry average of 7.76% - this after the company outperformed for most of 2008.

But Barron's Jonathan Laing says the numbers may be misleading. Early on in the credit crunch, when management realized it had overextended itself - particularly by pushing credit cards to consumers with more than one mortgage - AmEx began reducing outstanding credit with a vengeance by cutting credit lines, raising rates, and even offering high-risk customers cash to close accounts. The move wasn't popular, but AmEx managed to reduce its receivables to $57.8B from $65.9B. Which is great. Except that it magnifies its default rate in comparison to its peers by reducing the denominator (think of charge-off rates as default divided by total debt). Indeed, while charge-offs spiked in February, delinquencies rose just 12 bps and early-stage delinquencies actually fell by 9 bps.

Unlike its peers (Citigroup (C), Bank of America (BAC), JPMorgan (JPM)), AmEx's main source of revenue is from transaction fees, not interest charges - which means it has less credit risk. Its "closed-loop" network, through which AmEx handles all its own transactions from start to finish (while other banks rely on card issuers), means more money stays put.

Some worry about AmEx's liquidity, but a recent analysis shows the firm has about $25B in cash and cash-equivalents (thanks in no small part to the generosity of Uncle Sam) - more than enough to cover its liquidity needs of $20B over the next year. Recently on its website, AmEx noted its ratio of tangible common equity to risk-weighted assets was 8.5% - higher than most bank holding companies and comfortably above the "well-capitalized" thresholds.

While conceding that the waters ahead may still be rough, one analyst warns that, "we never know until after the fact when the inflection point comes, as low valuation finally trumps near-term fundamentals," and adds, "Most people are going to miss the party if they wait for the turn in credit losses."

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Tom Lindmark wonders what the impact of "the new American consumer" will be on credit card spending.

Victor Cook has spent some time trying to mathematically predict the likelihood of banks having hidden "hard-to-value" assets in their portfolio. AmEx raises a red flag in his scan.

Comments

[J. D. Swampfox:]

Another joins the chorus singing "investors are fools to be selling banks." Without the government, AmEx would have no liquidity. Its charge-offs are rising, but that's not important because AmEx relies on fees, not interest on those charged off loans...something just doesn't sound right with that analysis...

Apr 12 08:15 PM

[Lilguy:]

OK, AmEx has done a marginally better job than the idiots at Visa in cleaning up their accounts--by paying off non-paying clients of all things. NTL, Barron's writing on both of these companies is just the sort of happy talk BS that Tyler Durden (Zero Hedge) loves to shred like yesterday's newspaper. (See his post here on Time magazine's saying the financial crisis is over--seekingalpha.com/artic....) Also, Meredith Whitney--who has been right more times in the last two years than Barron's has been in a decade about the state of the financial sector--clearly sees credit card defaults as the next big wave to strike the banks. If I remember correctly, she put the default number by the end of this year at about $4 billion. And, of course, there will be a next year with unemployment even worse, etc.

Even with mark-to-myth accounting, that's going to be a hard one for banks to cover up in the ol' balance sheet.

Apr 12 09:36 PM

[wholesalecd:]

American Exp is a company that requires a substantially higher credit rating that Visa so I feel they will be fine in the default area. As far as fees go they are going to profit and return some of this back to the government and so on. There is also interest which this author didn't make a big deal on but "HEY" they are a Credit Card Company.

Jay

Apr 13 12:32 AM

[Obi-Wan:]

Amex has credit default exposure, Visa and MC don't. I would not get near Amex right now until it becomes clear that they have washed out defaults from their balance sheet or have reserved adequately at least. Lack of transparency around what defaults they truly have on the horizon makes me stay clear of this one, just like most banks.
Caveat emptor!

Apr 13 08:33 AM

[Sarah E. A.:]

Amex is not in as good a shape as this article portrays. In an effort to decrease their recievables they also closed accounts of individuals with good credit and positive payment history. Although its difficult to put a number on the value of a company's reputation, the fees Amex charges already are known to be much higher than any Visa/MC. If Amex is treating the individuals in the business community with little regard, this way of doing business will not be forgotten by the small companies it is affecting. Their reaction will be to no longer accept Amex. Visa/MC and cash only! The money they make on fees is at risk to decrease and any balance sheet position they have improved is nothing more than a mask over an ugly face.

Apr 13 08:44 AM

[TeresaE:]

AmEx pulled the credit rug out from under their best customers (small to mid sized business) and as those loans either default of pay in full, where oh where will they continue to post profits from?

The banks are forcing Americans to rip up their credit cards, every day more and more people wake up to the financial crimes we have had heaped upon us.

Banks will temporarily go up, but as the results of firing your best customers become evident (kind of like GM with their fired American suppliers/best customers), they are going to tank and tank.

And Washington will continue to print money and bury our children.

Apr 14 11:39 AM

[PROXIMO:]

Being pumped in a Barron's cover story is meaningless. There is nothing sacred about Baron's. Amex is a piece of sh#t just like the big banks with the CDS's and CDO's, and the major autos in Detroit. Sometime in the next year all that sh#t will sell for what it's worth.

Apr 15 09:16 PM

[Robert DiAl...:]

I don't have any positions currently in American Express or Visa. They are both impressive companies. Not sure where to enter. I will just wait and watch. No recommendations from me.

Apr 17 07:17 AM