Why is the Market Ignoring American Express's Bad Report? 28 comments
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Okay, I admit it: this market is now officially annoying me.
American Express (AXP) reported 1st quarter earnings after the close Thursday and from the behavior of the stock, you’d think it suggested a major turnaround and economic recovery. The stock was up 20% on very strong volume. The stock is now up 150% from its March 9th low - from $10 to $25.
But in fact the report clearly shows continuing economic deterioration. Even though earnings beat analyst estimates, the quality of earnings is very low. The company's core US Card Services business actually posted a loss of $25 million - compared to $523M in net income in the year ago period. The quarter also benefited from a $136 million after-tax profit related to Mastercard (MA) and Visa (V) settlements compared to $43 million related to Visa in the year ago period. That right there represents more than 30% of AMEX's $437 million in net income. Not a repeatable event and not high quality.
Most importantly, the credit card portfolio continues to show massive credit quality deterioration. The charge off rate on the $56.5 billion US Card portfolio leaped to 8.5% and the press release says AXP expects a 200 to 250 basis point increase in the 2nd quarter! That’s up from 6.7% in the 4th quarter, 5.9% in the 3rd, 5.3% in the 2nd and 4.3% in the 1st quarter of 2008. That is not a good trend!
Further, spending by card members is dropping precipitously. US Card billed business dropped 15% from $114.6 billion to $97.4 billion. Average basic US cardmember spending dropped 15.8% from $2,838 to $2,391 for the quarter. This suggests worldwide consumer spending is in freefall.
This is really getting ridiculous now and I’m annoyed.
Disclosure: Top Gun has no position in American Express shares.
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On Apr 26 10:53 AM Dr. O wrote:
> The big pop in AXP, like other financials, was likely short-covering
> and "bargain hunting." Stocks like AXP had been shorted/dumped into
> near oblivion in the belief that they were nearing bankruptcy. Clearly
> that is not the case, for now. Don't look to the stock price to tell
> you what a company is "worth."
You say AXP stock gains will be short lived and downtrend will resume. On what basis do you say this other than your own gut feeling?
There is a problem making predictions like you do. You are almost always wrong and this time will be no exception.
For answers we look at the charts.
As per the Daily charts AXP started breaking through various resistance levels starting 03/18/2009. Since then it has broken through 5 major resistance levels. For the past 2 weeks AXP has shown strong buy signals on weekly charts. Assuming the next 4 weeks bring no major financial disaster news it looks like AXP is set to start breaking new ground in both the daily and weekly charts.
Follow the trend, my friend, and leave your own prognostications and gut feelings aside. You will do better. When the trend ends you end your position and come back here and post messages why the trend ended and almost anything you say will sound believable and you will sound off like a hero.
anything below $20 assumes amex is no longer a going concern.
how about mentioning amex's "operating leverage?" they were profitable in one of the worst quarters in economic history, for heavens sake (even w/o the onetime).
Everyone knows that the whole reason amex's portfolio looks as bad as it does is because during the waning months of the credit bubble, they started going after the really low-quality borrowers...obviously, they incurred more expenses to do this. now, they need those borrowers like they need a hole in the head...thus, they slash expenses across the board (some 20%+...40% in advertising) because they no longer need those operations to take share. if anything is"ridiculous" its that you didn't bother to point this out. they jettison the low quality business operations just as fast as the low quality business decays. premium multiples get assigned to companies that have this sort of operating leverage. 20% tangible ROE isn't a fluke.
in terms of valution, their global network and merchant services business (which is exactly like visa/mstcrd...aka just the tech, clearing and settlement biz) made $1bn in earnings off of a capital base of $1.4bn...thats a 70% return on capital (go to page 39 to see these stats)phx.corporate-ir.net/E.... Mastercard made HALF that amount last year, yet mastercard is worth $22bn...Visa made 1.3 bn trailing 12 months and they are worth $47bn...amex's GNMS biz is somewhere between there, so that business alone is worth $25bn to $30bn using similar cap rates as ma and V. So at $29bn (even after the massive rally), amex is still completely discounting away the other 3/4ths of its business.
is there a good reason to think those businesses will take the company down? that's why we look at its liquidity profile.
(go to slide 27 from the ppt presentation...different from the above link)--- they have $25bn in cash and deposits to date, and $25bn in obligations over the next 12 months...deposits mind you are up roughly 15bn since Oct...that's a run rate any bank would be envious of...that's not including another 10bn in undrawn bank facilities and an untapped conduit. the bankruptcy of amex was on the table until they were allowed to gather deposits. deposit gathering easily offsets securitization...and at this point, is hundreds of basis points cheaper. their tangible capital to risk weighted assets is above 10%, which is better than any large bank, extant. so the capital positioning is as strong as its been since this mess started. keep in mind, at current valuations, the credit card portion of the business is just an option now, as the stock has completely discounted this away.
so keep calling things "ridiculous" with your undisciplined complaining and whining...that sort of emotional rubbish has no quarter in the investment profession...of course, you should know this...right? after all, you're a self-dubbed "financial top gun"
sentiment...
legitimate, enhanced, manipulated, or otherwise -
hey, i'm with you, annoyed ;-)
No.. this suggests US conumer spending is in a freefall
Right now Amex has a rapidly declining managed portfolio (owned + securitized loans) partly due to an intentional credit tightening by AXP and also due to a large reduction in spending - both of which are good in the short term imo as they will lead to first a stabilizing & then a reduction in charge-offs as underwriting is improved.
The reduction in total loans outstanding obviously affect the net interest income adversely but we also need to plug in the interest margin (which increased) and the charge-offs. Achieving a balance is important for the long term. But overall net interest income is usually no more than one-third of Amex business.
Of course transaction volume affects fee income but the discount % remains pretty steady. Fees for other banks issuing Amex cards are still increasing & of course here they don't take the credit risk.
The shares may not be worth what many thought they were last year but I would be far more concerned if the company's liquidity position were challenged than a few quarters of extremely high charge-offs. I don't think the liquidity position is in danger & in the current low short term interest environment both AXP & DFS are raking in low cost (to the companies) deposits which should further improve interest margins. Talk of paying back the government shows pretty much what AXP thinks of their liquidity position.
You certainly may be right that the share price could fall back -may be into the teens - and therefore you could make money shorting in the short term but this is no Citi or BAC and I think you are focusing too narrowly on the charge-off rates
On Apr 26 02:53 PM BrotherMaynard wrote:
> this guy has no clue how to value companies.
>
> anything below $20 assumes amex is no longer a going concern. <br/>
>
> how about mentioning amex's "operating leverage?" they were profitable
> in one of the worst quarters in economic history, for heavens sake
> (even w/o the onetime).
>
> Everyone knows that the whole reason amex's portfolio looks as bad
> as it does is because during the waning months of the credit bubble,
> they started going after the really low-quality borrowers...obviously,
> they incurred more expenses to do this. now, they need those borrowers
> like they need a hole in the head...thus, they slash expenses across
> the board (some 20%+...40% in advertising) because they no longer
> need those operations to take share. if anything is"ridiculous"
> its that you didn't bother to point this out. they jettison the
> low quality business operations just as fast as the low quality business
> decays. premium multiples get assigned to companies that have this
> sort of operating leverage. 20% tangible ROE isn't a fluke.
>
> in terms of valution, their global network and merchant services
> business (which is exactly like visa/mstcrd...aka just the tech,
> clearing and settlement biz) made $1bn in earnings off of a capital
> base of $1.4bn...thats a 70% return on capital (go to page 39 to
> see these stats)phx.corporate-ir.net/E...;t=1.
> Mastercard made HALF that amount last year, yet mastercard is worth
> $22bn...Visa made 1.3 bn trailing 12 months and they are worth $47bn...amex's
> GNMS biz is somewhere between there, so that business alone is worth
> $25bn to $30bn using similar cap rates as ma and V. So at $29bn
> (even after the massive rally), amex is still completely discounting
> away the other 3/4ths of its business.
>
> is there a good reason to think those businesses will take the company
> down? that's why we look at its liquidity profile.
>
> (go to slide 27 from the ppt presentation...different from the above
> link)--- they have $25bn in cash and deposits to date, and $25bn
> in obligations over the next 12 months...deposits mind you are up
> roughly 15bn since Oct...that's a run rate any bank would be envious
> of...that's not including another 10bn in undrawn bank facilities
> and an untapped conduit. the bankruptcy of amex was on the table
> until they were allowed to gather deposits. deposit gathering easily
> offsets securitization...and at this point, is hundreds of basis
> points cheaper. their tangible capital to risk weighted assets is
> above 10%, which is better than any large bank, extant. so the capital
> positioning is as strong as its been since this mess started. keep
> in mind, at current valuations, the credit card portion of the business
> is just an option now, as the stock has completely discounted this
> away.
>
> so keep calling things "ridiculous" with your undisciplined complaining
> and whining...that sort of emotional rubbish has no quarter in the
> investment profession...of course, you should know this...right?
> after all, you're a self-dubbed "financial top gun"
yes you can...its simply sum-of-the-parts...assume axp spins gnms business out as a standalone.
You can spout the market looks 6 mos ahead garbage, but when everyone loses their job, it becomes a leading indicator.
If no one spends and no one has a job, that's a tough market.
I trust me, and dont buy ´stocks now.
On Apr 27 06:25 AM H Nguyen wrote:
> The market is looking forward, some people still expect an economic
> bottom in 2Q and Summers and Bernanke think 3Q. Just wait for about
> a month when people see the retail sales and consumer spending coming
> negative, that is when reality will set in. Just remember to profit
> from it.
to all the chart lovers telling us to look at the charts, and maintain that the trend is our friend, i say this. the trend has been the friend of 99% of all stocks out there, not just AXP. if AXP were performing like this with a stagnant S&P, you may have a case for following the charts.
Instead of following the trend of the chart, how about we look at the trends outlined by the author, namely the continuing rise in delinquencies and customer purhases.
For the comment about expecting AXP to earn 3.00 in EPS. that seems to be way too much of a stretch. For that to occur, you must assume that consumer spending will once again rise to levels seen during the housing boom. Is that likely? No.
To have that kind of earnings power, AXP will have to venture out into the territory which is causing it problems now, namely the lower income spender. Although i feel AXP trading at around 10 was a bit extreme, AXP trading above 20 is just as extreme, and I have initiated a short position today at a price of 24.5. GL.
LONG V
SHORT AXP
Note-
If you listened to Goldman Sachs about 5 weeks ago youd be hurting. They recommended a pair trade of Long MS, Short AXP. Just an example of how pairs trading doesn't work perfectly or even provide a proper hedge.
On Apr 27 01:49 AM BrotherMaynard wrote:
> "I dont think you can compare directly AXP with MA or V in terms
> of market cap since MA and V has no debt whereas AXP has huge amount
> of liablities"
>
> yes you can...its simply sum-of-the-parts...assume axp spins gnms
> business out as a standalone.
that doesn't make any sense..."par" has nothing to do with it.
the assumption is that the gnsm biz is capitalized at a valuation somewhere between v and ma. if anything this biz would get a premium as it is an asset-light (70% roc) model
On Apr 28 01:22 AM BrotherMaynard wrote:
> "your assumption is that you can sell the credit card business at
> par"
>
> that doesn't make any sense..."par" has nothing to do with it. <br/>
>
> the assumption is that the gnsm biz is capitalized at a valuation
> somewhere between v and ma. if anything this biz would get a premium
> as it is an asset-light (70% roc) model
good luck valuing any financial based upon "enterprise value"...i'm sure it will yield lots of useful results.
I believe AXP will fall back to pre earning levels because of the following:
1. Sales in Q1 were weaker...and I am sure you will agree they will continue to be weaker.
2. Customer charge off (deliquencies) and they will only increase going further
3. Cost management was great : There were two areas they managed thier costs well :
a) Payroll expenses were lower : thats great
b) MArketing expenses were lower (significantly lower) : How low can these go and bigger question is should these be low. The lower cost was on two areas:
i. lower customer rewards (which obviously makes me an unhappy customer)
ii) Lower sales and promotions expenses.
Again you may be right that I am going by my gut , but again my gut is based on solid financial statement analysis.
I am holding on to my puts, even though I have take some beating as I still believe that its going to come down.
I haven't made any preductions except for AXP so I don't know how I can be always wrong. Even in this case I gave my opinion not really any prediction. I don't think I am qualified to give any prediction. Goos luck with your trend charts my ffrind. My last words if AXP blows through major resitances and skyrocket, guess where I am going for my next advice, I will be you my friend. Happy investing.
On Apr 26 01:57 PM InvestBaboo wrote:
> Dear Opportunistic Investor:
>
> You say AXP stock gains will be short lived and downtrend will resume.
> On what basis do you say this other than your own gut feeling?<br/>
>
> There is a problem making predictions like you do. You are almost
> always wrong and this time will be no exception.
>
> For answers we look at the charts.
>
> As per the Daily charts AXP started breaking through various resistance
> levels starting 03/18/2009. Since then it has broken through 5 major
> resistance levels. For the past 2 weeks AXP has shown strong buy
> signals on weekly charts. Assuming the next 4 weeks bring no major
> financial disaster news it looks like AXP is set to start breaking
> new ground in both the daily and weekly charts.
>
> Follow the trend, my friend, and leave your own prognostications
> and gut feelings aside. You will do better. When the trend ends you
> end your position and come back here and post messages why the trend
> ended and almost anything you say will sound believable and you will
> sound off like a hero.
How are your $24.50 short positions doing today :-)