This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Don't Count on a Quick Rebound From American Express

There's no doubt that American Express (AXP - Get Report) is one of the premier brands in the financial services industry. In fact, for years, AXP has earned risk-adjusted returns that surpass the rest of the industry.

The question is, how long can it sustain that? The year 2001 couldn't have been a worse one for American Express. And with consumer spending just beginning to slow and corporate profits under pressure, I can't imagine that its core travel-related charge card business is going to fare much better in 2002.

I know many portfolio managers who don't want to miss this stock -- if they haven't already. Since hitting a 52-week low recently of $24.20, AXP has bounced right back to $30, so it's not that cheap anymore. AXP is trading at a P/E ratio of 15 on 2002 estimates of $2.02 per share. That compares with a 10-year median P/E of 17.4 and a low of 9. On a price-to-book value ratio, AXP is even less tempting, trading at 3.3 times book value compared with a 10-year median of 3.2.

Yes, a takeover is quite possible, particularly in light of the recent resolution of the lawsuit AXP filed against rivals Visa and MasterCard. Assuming it's not reversed on appeal, the favorable ruling for AXP means banks can now issue Amex cards as well as Visa and MasterCard cards. As a result, many are speculating that AXP is now an attractive takeover candidate for a major bank.

  • Talbots
    Glenn Curtis

    and Tim Arango
  • Hasbro
    Arne Alsin

    and Gary B. Smith
  • Office Depot
    Arne Alsin
    Chris Edmonds
  • Oracle
    Glenn Curtis
    Jim Seymour
    Glenn Curtis
    George Mannes

However, saying that 2001 was a bad year for AXP is a bit like saying Bill Gates has a lot of money. First, there were the well-publicized problems at American Express Financial Advisors, where AXP had to take a big write-off in its high-yield bond portfolio -- a major embarrassment.

Then worries emerged about the slowing economy's impact on the travel-related business, which, being transaction-oriented, is highly correlated with economic activity, perhaps even more so than for other companies in the group. The tragic events of Sept. 11 only heightened these earnings concerns, and deprived American Express of its headquarters for well into the foreseeable future, as well.

Many of these issues carry over into next year and, if anything, worsen. American Express Financial Advisors has hopefully cleaned up its act with the benefit of more oversight. But there's no visibility at all on a turn in corporate spending, so travel and expense spending will continue to be weak next year. Then you have to worry about the interchange fee that Amex charges merchants who accept its card. It's still a hefty premium to competitors Visa and MasterCard, but it's been shrinking as Amex changes its mix of customers, cutting better deals with new merchants. This decline will likely eat into Amex's industry-leading return on managed assets, and that could have an impact on the company's brand equity.

Finally, there's the credit card business, which is arguably in much better shape than it was in the last recession in 1990. But that's an unfair comparison, because back then, the main credit card strategy -- Optima -- was an unqualified disaster. Since then, Amex has successfully restructured its credit card business. Nevertheless, it hasn't experienced a serious down cycle yet, so it's hard to say how well that business will cope with the likelihood of rising delinquencies. Take a look at the stocks of credit card lenders like Providian (PVN), whose shares are down 78% from their high, to get an idea of what can happen here.

Don't get me wrong -- I love the Amex brand, and so do many others. As one friend of mine said, "This is a portfolio manager's stock." I just don't love the price above $30, particularly with little earnings visibility. This company reports third-quarter earnings Oct. 22, and believe me, it will be ugly. But if the stock heads back down toward its old low of $24, I'd definitely be interested again.
Odette Galli writes daily for In keeping with TSC's editorial policy, she doesn't own or short individual stocks, although she owns stock in She also doesn't invest in hedge funds or other private investment partnerships. She invites you to send your feedback to Odette Galli.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AXP $71.74 -0.15%
AAPL $118.91 0.93%
FB $104.40 -1.00%
GOOG $745.87 -0.59%
TSLA $230.66 -0.41%


Chart of I:DJI
DOW 17,780.97 -17.52 -0.10%
S&P 500 2,088.59 -1.52 -0.07%
NASDAQ 5,119.2540 -8.2710 -0.16%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs