American Express: False Sense of Security?

It is no secret that I am no big fan of the bank and financial sector, particularly the consumer credit divisions. The numbers out from American Express Company (AXP) (see transcript) show that during Q1 they saw a 6% decrease related to credit card losses and reported a significant increase in total spending and credit usage by customers. So essentially, they are lending more money during a time when they are seeing a higher level of delinquencies and defaults. (Scratching head …)

Bloomberg.com: Worldwide
April 24 (Bloomberg) — American Express Co., the biggest U.S. credit-card lender, reported first-quarter profit that beat analysts’ estimates as income rose overseas. The company climbed more than 4 percent in extended New York trading.

Net income from continuing operations at the New York-based company declined 11 percent to $974 million, or 84 cents a share, American Express said today in a statement. That’s 4 cents better than the average estimate of 17 analysts surveyed by Bloomberg.

American Express, Capital One Financial Corp. and Discover Financial Services shares have dropped more than 25 percent in the past year on concerns rising U.S. unemployment will hurt consumers’ ability to repay debts. The damage at American Express was cushioned by a 30 percent rise in overseas profit to $133 million as customers spent and borrowed more.

The biggest dislocation I see is still in the future outlook as compared to the stock price for many of the constituents within the banking sector. With all of the downgrades along with the fact that we are seeing a historic rise in defaults, what is it that I am not seeing? BEFORE you answer that, whatever you do, don’t tell me that the worst has been priced already as that is not possible. There has got to be something else as there are reports, predictions and further “shoes” to drop from eco-space.

Comments

[Adam Axler:]

I certainly won't. AmEx is a better business than COF, which has seen a 33% rise in shares over the last 3 months, and has much greater exposure to auto and even home loans. The American consumer is broke. I don't know why there is any optimism about the consumer to take on and pay debt.

2008 Apr 25 08:22 PM

[frcf:]

What an ‘excellent’ evaluation of AXP! With comments like ‘…they are lending more money during a time when they are seeing a higher level of delinquencies…’ or ‘…BEFORE you answer that, whatever you do, don’t tell me that the worst has been priced already…’. (LOL)

Obviously the author is able to (or expects to be able to) catch the bottom, or time the market. Has it ever occurred to him that when it becomes obvious to the street that the financial crisis and the economic downturn are behind us, AXP’s stock would have already shot up 50%. If the economy was firing on all cylinders, you would very likely have to pay at least 25 times earnings for AXP. The only time you can pick up one of the highest quality businesses in the world at 13 times depressed earnings, IS during a severe downturn.

What determines the true value of a business is the stream of its future earnings discounted at an appropriate rate of return, not the day to day or month to month stock price action. And if you can take advantage of a downturn to purchase a quality business at a huge discount to its intrinsic value then you’ll be handsomely rewarded, regardless of whether ‘the worst is priced in’ or not.

I can’t believe this guy has written a book on investing!!!

By the way, the famous value investors at Tweedy Browne, used the recent downturn to add to their AXP holding: www.dataroma.com/m/hol...

2008 Apr 25 09:18 PM

[Peconic Bay:]

If we don't see unemployment rise sharply, the consumer's ability to support revolving credit will not be severely impaired. If this holds true, Amex doesn't have to share the same fate as investment, commercial and mortgage banks

2008 Apr 25 09:27 PM

[User 183718:]

The first writer is right, the American public is broke. As American Express will soon find out. I can say without a doubt that's why
Visa just went public. Their scared to death that the next bubble to burst will be on credit card defaults.

2008 Apr 25 11:24 PM

[ChrisS:]

I'm old enough to have seen a lot of ups and downs. I have no concern of ever standing in a bread line. Numerous affluent associates who were overextended and deep into real estate have lost nearly everything, but they are still eating out, taking trips and rebuilding their lives. Some have changed careers and businesses. The strong are strong for good reasons: mainly perseverance and determination. AXP will do just fine. I'll be carrying their card until the day I die.

2008 Apr 26 12:02 AM

[TA:]

AMX is very good value right now - if I did not own plenty of other financials I would have been in at the low 40s.

2008 Apr 26 12:07 AM

[User 172125:]

Amex has nothing on V

2008 Apr 26 03:29 AM

[mr money man:]

i read the article on the amex i think it was very good but need to be reanalyzed if i didnt know the company i would probably just agree. see amex is not like it competitor's amex dose not play on high risk like visa and master card that why more company's had 75% default rate as to amex it was not even half. and i can explain why amex has acsess to public records just like any one else and if they see your defaulting on your other card they will either (A) LOWER YOUR LINE OF CREDIT TO MINAMIZE YOUR SPEND ING IN A TIME OF TROUBLE OR (B) CLOSE DOWN YOUR CARD. remind you the majority of card holders with the company are middle and upper class that can weather the storm. unlike visa and master card it a mixture of both but with a majority of middle class and lower class card holders. also two visa and master card gamble when your defaulting by keeping your line of credit high and in some cases even raising it unlike amex. so for those of you who hold your visa proud beware be cause in the next couple of years you just might find an amex card to replace it! oh and one more thing the next time you want to compare credit card company's compare all of their financial reports to each other then unleash your thoughts! till next time place your money on amex i bet you wont regret it.

2008 Apr 26 01:37 PM

[User 183867:]

Amex's Q1 provision for losses on the charge card went up 65% YoY while net charge-offs went up 32%. Charge card receivables increased 7% YoY.

For cardmember loans (revolving credit), provisions for credit losses increased 43% YoY and net charge-offs were up 58% while loans increased 17% YoY. The coverage of loan loss allowances to delinquencies increased YoY to 101% from 100% last year.

I don't know where your numbers are coming from, but those are the numbers as I see them.

2008 Apr 26 02:16 PM

[mr money man:]

ahhh finally some one with some sense i like this guy, but like i said if i would have just read the report i would be agreeing with you. but being that i am a player in the field of the major corporate giant i am sure the write down will decrees not only that amex has allot more deals on the table for the future. remind you those are the remainder major write downs i am not saying their all done but what i am saying is they will go down from those numbers your seeing. also your only comparing the write for q4 and q1, witch is what most smart people would do, but when q2 comes out then you will see what i am talking about. the company is well prepared for those write downs and new what was ahead way before the all it competitors. expect to see less write downs and trust me the stock will go up compared to other major company the write downs are nothing. please write back i just found this site and i like talking to smart people just to get their views who knows one day you might help me with some thing i am not seeing...

2008 Apr 26 03:39 PM

[mr money man:]

please read this is on the q & a page of the q1 meeting held with amex this will hopfully give you a better understanding how amex handles credit. if you look at folks that are either renters or people who have had a mortgage that is older than 2003 again, it’s been relatively modest change in terms of credit behavior. On the other hand, if you look at folks who have a mortgage that is more recent than that or people where we don’t have mortgage information that’s where we’re seeing the greatest increase in delinquencies. That’s to give you an idea of how it’s different but it’s really different on the credit side as opposed to on the spend side.

2008 Apr 26 04:15 PM

[mr money man:]

just to correct myself on what i wrote on q3 their should be less write down sorry about that i relized theirs no way to go back and edit what you write sorry for the incorrect info

2008 Apr 26 04:23 PM

[ari5000:]

My feeling is AMEX cards with their yearly fees may be used primarily by wealthier customers -- so they may not see the same level of defaults by those companies that offered all those teaser rates.

If AXP can clear 48.56 it should be good for 20%. I wouldn't bother but it does like poised to run

2008 Apr 26 04:39 PM

[bishk1301:]

This is just another buy high sell low guy. Where were the doomsday sayers when the financials were at their peaks? Even if more writedowns are coming the whole world is out there to capture for plastic. Brandname like Amex can not hurt.

2008 Apr 27 05:46 AM

[Pitepalt:]

The way to make money is to buy lower and sell higher. I can't pick the bottom so I don't try. During these times I buy high quality names that are on sale. There is no doubt in my mind that AMEX will be much higher in 2-3 years.

2008 Apr 27 10:17 AM

[greenstuff:]

I am long AXP and short Visa and Master Card. Two Reasons:
1. American Express, (for the most part) requires monthly payoff and does not allow debt carryforward.

2. American Express caters to the "Baby Boomers" who are minimally affected by the credit crisis, expecially the "sub-prime" crisis.

The financials will have a series of 5 to 7% rise and falls in the next two months, before they begin to stabilize and start a modest move upward, until they reach their peak sometime in late 2009.

AXP will begin this rise within the next two weeks and will have little or no downside. Master Card and Visa will suprise the market next week, because of the demographics of their customer base.

2008 Apr 27 02:25 PM

[User 183867:]

<1. American Express, (for the most part) requires monthly payoff and does not allow debt carryforward.

2. American Express caters to the "Baby Boomers" who are minimally affected by the credit crisis, expecially the "sub-prime" crisis.>

58% of the company's card assets are revolving loans.

Also, you don't get a national credit problem without involving the country's largest generation. The Baby Boomers are, most assuredly, in the thick of the subprime crisis. "Subprime" doesn't necessarily mean someone who has no means. Subprime means someone who has stretched themselves to far. In any case, this isn't just a subprime crisis. There are plenty of people who are not subprime but who are stretched and who have structured their balance sheets poorly.

A better argument would involve the 12% of card receivables and loans that are backed by corporations, where the risk of default is minimal.

2008 Apr 28 07:55 AM

[greenstuff:]

Post earnings announcement gives us a 10% decrease in the companies stock price from today's high. You may have relevant technical thoughts, but the stock should have been shorted prior to today's earnings. I stand by my theory that both V and MA will surprise.

2008 Apr 28 08:03 PM