Don't Leave Your Portfolio Without American Express

And just a few weeks ago, the market decided to bestow a valuation of 24 times forward earnings on the long-bumbling provider of the Discover card, Discover Financial Services(DFS Quote) when it split off from Morgan Stanley(MS Quote). Yet American Express -- which has put up years of awesome cash flow and industry-leading return on capital, and which has undimmed prospects both at home and overseas -- is going for what amounts to just 16 times projected 2008 earnings. This is like pricing a Mercedes-Benz as if it were a Yugo.

American Express is going to report second-quarter earnings next week, and the results should open some eyes. You can expect total billed business, which is the typical marker of credit card companies' success, to be up as much as 15% on an annualized basis, to around $161 billion.

One of the reasons for this may surprise you. It turns out that a lot of people, especially those who have company-issued cards, use American Express cards to buy gasoline. And since gas prices are up 6% over last year, the value of what the industry calls "everyday spend" will be up at least that amount, which is higher than what most investors are expecting. American Express has been increasing its exposure to everyday spending steadily over the past half-decade to the point at which it is two-thirds of its entire billed business.