Analysts at Well Fargo downgraded American Express Company (AXP), and analysts at R W Baird downgraded AT&T (T) and Verizon (VZ). The author agrees with the downgrades and would rate the shares Neutral or Market Perform; here's why.
On Thursday analysts at Well Fargo downgraded credit card issuer American Express Company. The firm cut its rating on AXP from "Outperform" to "Market Perform," but raised the price target range from $52-57 to $60-64. The new range suggests up to an 8% upside from Wednesday's closing price of $59.06.
An analyst at Well Fargo commented,
"We are downgrading our rating on shares of AXP to Market Perform based on our expectation for limited upside potential in the stock. Our valuation range is now $60-64, which does not offer sufficient upside to maintain an Outperform rating...we prefer investors to add to positions at lower levels in order to improve their risk/reward profile."
American Express has a market cap of roughly 68 billion and is trading at a P/E of 14.4. P/S is 2.13 and P/FCF is 8.18. American Express has a debt/equity ratio of 3.35.
In addition, American Express compared with Visa, Inc. (V) and Mastercard Incorporated (MA) is a fundamentally weak issue. Sales the past five years at Visa and Mastercard have been better and earnings growth estimates for next year and the next five years are higher for Mastercard and Visa than American Express. Mastercard and Visa haven't accumulated debt. The same can't be said for American Express.
The stock is trading above a rising 50-day moving average and is up almost 50 percent from the October low. YTD the stock is up just over 25 percent.
AT&T and Verizon were downgraded by analysts at R W Baird. The analysts cited valuations and industry ROIC concerns given the need to upgrade spectrum and slowing revenue growth. Verizon's price target was lowered from $41 to $37 and AT&T's remains at $31.
Smartphone users are using increasing amounts of data and the enterprises will have to pay a hefty price for "fresh spectrum." In addition, sales growth is slowing and free cash flow generated by telecom providers has been stagnant since 2007.
Verizon is trading below the flattening 50-day moving average with a P/E of 44.79. AT&T is trading above the rising 50-day moving average with a P/E of 47.29. Both firms have forward P/E ratios in the low teens.
Earnings the past five years at both telecom companies have been dismal and the prospects for dividend growth in the heavily regulated industry are subpar. One of the biggest read flags is the roughly 18 percent decline in insider ownership of both issues. When insiders are selling heavily it usually isn't the time to own shares of the issue.(In comparison, Insider ownership of Visa increased 7 percent.)
Expect Verizon, AT&T and AXP to market perform or underperform in the coming quarter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.