American Express (AXP) deserves credit

By Geoff Seiler, editor BullMarket.com

Banks and other financial services firms were pummeled by the credit crisis, but with signs of business and consumer spending starting to improve, credit-card issuers have come back to life.

One of the top performers since the market lows of last March is former Recommended List selection American Express (NYSE: AXP), whose fortunes have started to turn positive.

The share price of the New York-based issuer of charge cards plunged below $10 during the depth of the market sell-off, but steadily gained strength in the ensuing months, topping out at $43.25 just prior to the release of the company's Q4 2009 results. 

The shares have backed off since the report even though there were some positive trends that emerged.

Topping the list of improvements were the fact credit quality improved and cardmember spending increased year over year. In another sign the worst of the crisis has passed, management also boosted its promotional spending to encourage future growth.

For the three months ended December 31st, American Express said its net income rose to $716 million, or 60 cents per share, from $240 million, or 21 cents per share, in the same quarter a year earlier.

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Excluding a penny of earnings from discontinued operations, the credit card company earned 59 cents a share, which topped the consensus Wall Street estimate by two cents.

Revenues net of interest expense totaled $6.5 billion, which was basically flat with the year-earlier period but better than the analyst forecast of $6.1 billion.

The company got a big boost from lower credit losses. In the most-recent quarter, the company's provisions for credit losses plunged by -47% to -$748 million compared with -$1.2 billion in the year-ago period.

Card membership totaled 87.9 billion, which was down -5% from last year as reported, but normalized to exclude 3.3 million inactive cards that the company cancelled in the past year and membership was down by just -1%.

Amex is focusing on its affinity branded cards with airlines, hotels, and retailers and said it is getting more proactive about pushing card acceptance by merchants around the world. It focused on core products like the Gold card and stopped pushing newer ones like Blue over the past year.

It is also in the early stages of forming an enterprise growth unit, beginning with closing on the purchase of the payment processor Revolution Money at the start of the year.

The company is a low-cost provider whose products include a pin-based credit card, person-to-person payments ala PayPal, and the only interchange network that doesn't charge merchant fees.  It’s the first new payment brand introduced in the U.S. since Discover Network in the 1985.

At a subsequent analyst day meeting in February, Chenault said Revolution Money puts American Express in the position of enabling customers to pay for goods and services more flexibly, including online and over their mobile phones.

Wall Street has warmed up to the Amex story with many analysts boosting their ratings on the stock in the second half of 2009. At present, 13 of the 23 firms that follow Amex are recommending the stock.  Eight are neutral while two remain bearish.  The median target of those analysts is $47 a share.

Our take: American Express was a longtime BMR favorite in the years prior to the onset of the recession as it was always a pretty consistent performer. 

To its credit, for as tough as last year was, American Express was able to report a profit in every quarter, which is something many big banks cannot say. Sometimes it was pretty thin, as in the 9 cents of EPS in the first quarter, but it wasn't a loss. 

Management acknowledged that revenue and earnings are still well below pre-recession levels, as is the stock price, but the company's metrics are headed in the right direction.

We commend management at Amex for steering the company through a difficult period.  With one of the best-known brands in the world, we think the company is in an excellent position to grow along with the rebound in the global economy.

It's ratcheting up the spending again, which shows management is optimistic about the future, as that is a lever it can push and pull to suit the times. We would place a target on the stock of around $44, which is about 14x its 2010 EPS estimates.

Learn more about this financial newsletter at Geoff Seiler's BullMarket.com.