For Rothbort's preview heading into the American Express conference call, please click here.
We got the obligatory commentary about the difficult operating environment and a cautious outlook from American Express (AXP - commentary - Cramer's Take).
Digging deeper into the release, however, I found that the quarter was not as rosy as the headline numbers indicate.
Included in EPS from continuing operations was $220 million from the MasterCard (MA - commentary - Cramer's Take) and Visa (V - commentary - Cramer's Take) settlements. That needs to be backed out as they are non-recurring and non-operational.
Also, the effective tax rate came in at 24.4% vs. 29.1% a year ago due to some tax benefits.
People believe the headlines, however, instead of reading the details, and hence American Express stock rose over 6% after hours. If I adjust EPS for the legal settlements, the company would have earned 60 cents per share for the quarter. If you normalize the tax rate, then the company would have made even less.
There are some good and bad factors to which to look forward.
The bad: Management said in no uncertain terms than the environment was deteriorating while writedowns and losses would continue to increase into the early part of 2009. Individuals and business are cutting back on discretionary spending and travel, which will not portend a robust fourth quarter.
The good: On some level, American Express stock is oversold and could rebound to $30 or more. As long as the liquidity spigot is open, the company's dividend will get paid despite falling profits, and a yield of about 3% is a nice cushion to have in this market.
American Express reported third-quarter 2008 earnings from continuing operations of 74 cents per share on revenue of $7.16 billion. Travel sales have slowed significantly from the last quarter.
The company will take action resulting in restructuring charges in fourth quarter 2008, but no more details were provided.
American Express now has access to the Fed's discount window and will participate in the commercial paper funding program. The company has a net funding need for commercial paper of about $4 billion.
Credit card metrics:
The billed business rose 8% year over year, which was more than the competition but still reflects a slowdown from first-quarter 2008 growth of 14% and second-quarter growth of 12%. The billed business also grew at a year-over-year rate of 5% in September and slowed further in October.
The company added 2 million net new cards since the second quarter and 7.4 million since the prior year.
American Express reported 4% growth in proprietary cards and 25% growth in network cards.
Managed loans grew 5% year over year.
Average card member spending rose 1% year over year.
Interest metrics:
Net interest and securitization income declined 7% year over year due to higher credit losses and a writedown in the I/O strip.
Net interest income rose 13% as higher spread yields offset declining loan balances.
Credit metrics:
The charge card net loss ratio rose to 0.33% from 0.29% in the second quarter and 0.26% in the year-ago quarter.
Ninety days past due rose 20 basis points in the quarter.
The card write-off rate increased, as was forewarned in the prior quarter's conference call, rising 60 basis points sequentially and 290 basis points year over year.
U.S. write-offs were 5.9% in the quarter, with September at 6.1%, and the U.S. write-offs are anticipated to increase sequentially in both the fourth quarter of 2008 and the first quarter of 2009.
P.S. Will you be there when Cramer makes his next move?
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Financials AXP Preview: Be Braced for the Worst 10/20/2008 8:45 AM EDT Analysts expect the company to earn 59 cents per share on net revenue of $7.31 billion.
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Financials C Preview: How Much Will It Write Down? 10/15/2008 3:55 PM EDT The company is expected to report a loss of 77 cents per share on revenue of $19.49 billion.
At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.
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