AMEX SHARES: A SOLID CHOICE--BUT NOT INFALLIBLE
American Express (AXP) is clearly doing a lot right. It has turned around its once- foundering credit-card division and is beginning to gain market share against rivals Visa and MasterCard. An attractive awards program and wider merchant coverage has increased the amounts U.S. customers are putting on their cards. And outside the U.S., AmEx is putting more and more cards in circulation, mainly by partnering with foreign banks.
For the third quarter, earnings at the company's Travel Related Services division, which includes American Express charge cards and accounts for about two-thirds of the company's profits, rose 17%, to $362 million. Its Financial Advisors division, which offers financial planning services and contributes about one-third of earnings, reported an increase in net income of about 15% from last year's third quarter, to $211 million. It benefitted from increased assets under management, resulting in higher fee revenue and strong mutual-fund sales. (AmEx also has a Bank & Travelers Cheques division that suffered steep declines in earnings due to the downturn in Asia, but fortunately for AmEx, it's a small part of the company, contributing just 4% to 1997 profits.)
What has impressed Wall Street is that AmEx was able to post strong third-quarter results despite the steep stock market decline and economic crises in Asia and other emerging markets. Overall, it boosted earnings per share 14%, to $1.24 per share compared with $1.20 a year ago, on revenue growth of only 6.4% (to $4.8 billion). Those results persuaded many analysts that the company can maintain its goal of 12% to 15% annual earnings growth, even if the environment for financial services companies continues to be difficult.
ENVIED MIX. Such a promise fulfilled would create "the earnings consistency and visibility that supports a premium valuation for the shares," analyst Susan L. Roth of Donaldson, Lufkin & Jenrette wrote recently. She currently has a target price of 120 on the stock "Simply put, American Express already has what most other financial services companies are now working to build: brand equity, global reach, a product mix that has above-average top-line growth potential, the marketing expertise to capitalize on the revenue growth opportunity, and scale in its core businesses," she wrote.
Admittedly, the stock isn't as cheap as it was a few months ago. AmEx fell from a high of 118 5/8 on July 15 to a low of 67 on Oct. 8. But along with the broader market, it rocketed back up to 110, before falling back a bit in recent weeks. It closed on Dec.10 at 97 1/8.
"I put a strong buy on AmEx in September, when the stock was at around $70, $71," says Maitland Lammert, an analyst with Edward Jones. "Even though its price has recovered a lot, the long-term outlook is very positive." With a forward p-e multiple of 17 times her 1999 estimates and the S&P 500 trading at a p-e of 23, she believes AmEx has further to run.
Still, any investor who buys the stock at this level should keep some caveats in mind. If global economic conditions worsen, AmEx won't be able to avoid the fallout. Credit-card spending will drop off, travel will slow, and financial planners won't have as many client assets to manage. PaineWebber analyst Gary Gordon, who describes himself as "pretty optimistic" about the company, believes that given the hazy economic forecast, "$105 a share is about right."
PATIENT INVESTORS. Donaldson, Lufkin's Roth is a bit more optimistic, since she believes the company has the financial flexibility to meet its earnings targets. Even if revenues slow, it can buy back shares or cut costs to make earnings come in line with expectations -- and keep Wall Street happy. The financial planning emphasis should also help out. "One of the beauties of the financial planning business is that your customers tend to be less quick to pull the trigger" and cash out of their investment portfolio when the stock market tanks, notes Lammert.
Long term, AmEx's effort to expand its global network by getting foreign banks to issue American Express cards has the potential to vastly increase revenues, analysts believe. Another boost down the road could come from the Justice Dept.'s case charging rivals Visa and MasterCard with anticompetitive practices. The case isn't scheduled to go to trial until late next year, so it isn't yet factored into analysts' investment scenario. At the very least, though, one result of the case should be to force Visa and MasterCard into allowing U.S. banks that offer their cards to offer American Express cards as well, says Mark Alpert, an analyst at BT Alex. Brown.
Even if the global network strategy doesn't build revenues as quickly as anticipated, American Express could achieve heft and global reach by merging with another financial services powerhouse. PaineWebber's Gordon believes the strength of American Express' brand name is too great for it consider such a move. But other analysts say they wouldn't rule it out.
For long-term investors looking for a core holding in financial services, American Express seems a like a solid choice. But be prepared to ride the waves if the market tanks or if the economy slips into a recession. American Express is a good company doing a lot right, but it isn't going to buck basic trends in the stock market or the economy.
By Amey Stone in New York
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