With a stellar earnings report, American Express (AXP) has proven to be a resilient company capable of surviving a terrible recession. Despite unemployment remaining at high levels, a contraction in consumer credit, many Americans having less disposable income than they may have had at any time in the past decade, Amex keeps rolling along. With a quarterly earnings increase of 27% and bad debt dropping to 2.7% from 3.2%, Amex is reaping the rewards of increased consumer spending – the kind of consumers who don’t default on their credit cards. This follows the trend we’ve seen in upper-level retailers such as Tiffany and Co. (TIF). People with jobs and money are spending.
However, there is a longer term story at play with Amex. It remains a global brand that could not be undone during the recession. Huge spending cuts by consumers did not torpedo Amex, despite its only controlling 3.91% of global credit card transaction. It isn’t just the brand’s resilience to economic uncertainty that impresses, it’s that Amex only has 3.91% of the market. While competitors like Visa (V) and Mastercard (MA) continue to fight over the lion’s share, Amex has much more room to grow than it does to contract. Amex trades at a p/e of about 14, less than the 21 p/e at Visa and 19 at Mastercard. Amex is a world-class company deserving of a position in any long-term portfolio.
Along the same lines, I continue to be very impressed with US Bancorp (USB). The company rocketed 7 cents past net income expectations and 3.4% above revenue estimates. Like Amex, the company released a sizable chunk of cash from its loan-loss reserves. Credit quality also improved, just as it did with Amex, adding fuel to the idea that wealthier people are consuming and paying off on time. The company is also generating a lot of new loan volume in commercial, commercial real estate, credit card, and mortgages. The company had always been very careful with its underwriting and consequently was never significantly exposed to the mortgage meltdown that affected so many competitors. US Bancorp trades at a p/e of 14, slightly below the industry average of 15. The company says it will return value to shareholders via dividends and share buybacks. I see US Bancorp as a buy for at least the intermediate term.