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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

American Express

October 23rd 2009 American Express
NYSE Symbol: AXP
Industry: Credit Cards
Price as of 10/22: $34.58


Another big week for earnings. The multinationals are easily beating earnings estimates thanks to the weak dollar and dramatic cost cuts. 3M is up 65% since we featured it back in February. The good news is the better than expected earnings this quarter should help justify the big run up in the major averages since March. In recent weeks I've vaccillated between featuring growth stocks and income stocks. This week I'll feature a Dow component with good growth prospects with income potential once the economy recovers. The featured stock of the week is the credit card company, American Express. The credit card business can be very volatile, especially during the financial mess we just went through, but American Express weathered the storm quite well. The company reported earnings this week easily beating estimates, demonstrating good management and sound judgement in these volatile times.
Thursday night, American Express reported earnings of 44 cents or $523 million, beating estimates by 6 cents. Revenues fell 16% year over year to $6 billion, but beat estimates of $5.92 billion. Consolidated expenses declined 17% to $3.9 billion as the company trimmed jobs, marketing, and rewards costs. A positive sign that the company has a good handle on operations. The news keeps getting better every quarter for American Express. Provisions for losses decreased by 10% from a year ago. The decrease reflected lower loans and receivables, as well as recent improvements in credit trends in both the charge and lending portfolios. On a managed basis, the net loan write-off rate came in at 8.9%, down from 10% in the second quarter. Owned net write-off rate was 9.8% in the quarter, down from 10.3% in the second quarter. Its tier-one common risk based ratio was 9.7%, which compared favorably to the regulatory benchmark of 4% or better. Management made encouraging comments that while the third quarter revenue declined because cardmember spending and loan volumes were down from year-ago levels, overall billings have stabilized during the last few months. They also indicated they see the beginnings of a pick up in corporate cardmember spending. American Express relies on affluent and corporate customers more than its peers, which is good news. High unemployment will remain a concern, but American Express is seeing broad-based improvements in credit quality. The trends in cardmember spending are encouraging and there are signs that the recession may be approaching an end. American Express also anticipates a sequential improvement in their loan loss provisions during the fourth quarter. As one analyst mentioned, American Express looks like it has the ability to rebound in this time of turmoil and still be in a good position to take advantage of the recovering economy.
The valuation of American Express is not as good as it was a couple months ago, but the earnings estimates have a lot of upside over the next several years. Currently the stock trades for 1.6 times sales, 3 times book value, and sports a PE of 18 times conservative numbers. An analyst at William Blair indicated that credit quality at American Express continues to improve. FBR Capital raised their fourth quarter and full year 2010 estimates to 57 cents and $2.95 verse the 48 cents and $1.93 consensus. Based on these earnings estimates, American Express trades for a PE of just 12 times earnings. The company has a dividend yield of 2% which should get boosted once the economy eventually recovers.