AmEx: Leaner -- and Greener?


By Eric Wahlgren When a company's revenues are largely tied to business travel and corporate spending, it's not surprising that a recession and the September 11 terrorist attacks would do a number on profits. So it's understandable that American Express (AXP), the travel agency and charge-card issuer, posted four quarters of earnings declines in 2001.

Last year's woes seem to be receding, and 2002 is looking up for AmEx. Thanks largely to a major cost-cutting campaign, the New York-based financial services firm's profits rose for the first time in more than a year in the first quarter. "There's definitely a positive turn going on in its business," says Jennifer Scutti, an equity research analyst at CIBC World Markets in New York, who recently raised her investment rating on AmEx shares to buy. "I'm much more positive than I've been."

NEAR ITS HIGH. Unfortunately for investors who don't already hold AmEx shares, much of this anticipated recovery is already priced into the stock. Since its post-September 11 closing low of $25.61, the stock has charged up 64%, to close at $42.05 on Apr. 26, $4 off its 52-week closing high.

Still, many analysts say this is a good stock to own when economic uncertainty prevails. Fans say it could appreciate at least 14% this year, which is likely to beat the Standard & Poor's 500-stock index' performance. Matthew Park, an equity research analyst at Thomas Weisel Partners in New York, has a buy rating on the shares and a 12-month price target of $48. But, he adds: "From a valuation perspective, I would be much more aggressive if the stock went below $40."

The reason many analysts are bullish is that AmEx has been a relentless cost-cutter, which allows it to squeeze more profits out of harder-to-come-by revenues. As part of its continuing "reengineering" initiatives, AmEx axed about 7,000 jobs, or 8% of its workforce, in the first quarter. That was on top of the 5%, or 4,433 jobs, that it sliced in 2001, bring its global headcount to just over 77,000.

PAYING OFF. "If revenue growth is moderate rather than strong, it can deliver good earnings," says Howard Mason, an equity research analyst at Bernstein in New York, who has an outperform rating on the shares. "If revenue growth exceeds expectations, it will produce very strong results." AmEx has long-term targets of 8% annual revenue growth and 12% to 15% annual earnings growth.

The leaner-and-meaner strategy clearly paid off in the quarter ended Mar. 31. On Apr. 18 AmEx reported 15% higher profits on just a 3% rise in revenue. It earned $618 million (46 cents a share) on revenues of $5.54 billion, compared with profits of $538 million (40 cents a share) on revenue of $5.38 billion in the first quarter of 2001.

Most revenue comes from the Travel Related Services unit

Of course, year-ago quarter results included a $182 million pretax charge for junk-bond losses in its Financial Advisors unit, which comprises AmEx' financial-planning and mutual-fund businesses. Last year, that group accounted for about 13% of AmEx revenue.

The bulk -- 84% -- came from the Travel Related Services (TRS) unit, which includes the American Express Card, travelers' checks, and the travel agency among its businesses. The unit's net income fell 11% in the first quarter, to $467 million from $522 million a year ago. The reason: Revenues from travel commissions and fees dropped, as did corporate-card spending on travel and entertainment.

UNIQUELY POSITIONED? Several analysts predict that AmEx' fortunes could improve dramatically with an economic upturn. They're encouraged by recent data -- including the late-April report that the economy grew at a surprisingly strong 5.8% rate in the first quarter -- bolstering the view that the downturn is over. AmEx, they argue, is in a unique position to benefit from the upturn because some 40% of its charge-card business is driven by corporate cards, a greater percentage than its competitors.

Analysts say the Financial Advisors unit also appears to be on track for better results this year even though, like everyone else in the mutual-fund business, AmEx is dealing with a rocky stock market and fund outflows. On the bright side, Park says, the company's high-yield losses are now behind it. Increased investor confidence and rising equity prices, perhaps in the second half, would revitalize this business, he adds. What's more, he says, AmEx has aggressively recruited fund managers from rivals, including several high-profile names from fund giant Fidelity.

An AmEx spokeswoman says the company would not comment beyond the remarks made by Chief Financial Officer Garry Crittenden on Apr. 18 in a conference call discussing first-quarter results. Among his remarks that day: AmEx plans to begin buying back shares at the end of the second quarter. That could lift the stock price.

SKEPTICS. The outlook for AmEx isn't without some caveats. Part of the optimism comes from analysts' expectations that profits will surge in 2002. Scutti sees net income increasing 107%, to $2.7 billion ($2 a share), from $1.3 billion (98 cents a share) in 2001. Those numbers may seem impressive, but even if AmEx succeeds in hitting them, it wouldn't match 2000's performance. That year, AmEx posted earnings of $2.8 billion ($2.07 a share) on revenues of $23.7 billion.

And some analysts are skeptical. "I don't see what the attraction is," says Moshe Orenbuch, an equity research analyst with CS First Boston. He's more enthusiastic about other card issuers, partly because those companies didn't get hit as hard by the downturn in corporate travel. He has a hold rating on AmEx.

Lehman Brothers Analyst Bruce Harting says he would like to see AmEx crank up growth in card accounts to at least 10% before talking up the stock. The number of AmEx cards in force worldwide increased 4%, to 55.6 million, at the end of the first quarter compared with the year-ago period. He has a market-perform rating on the stock.

"A LITTLE VOLATILE"? Given AmEx' brand name and membership in the 30-stock Dow Jones industrial average, Harting says he understands why investors wouldn't want to miss out on stock if the economy is rebounding. "I'm just concerned that if economic data show a less robust recovery, AmEx will be a little volatile," he says.

Even so, some respectable gains may be possible this year, especially if the economy does come back fairly strong. If the healthy rebound scenario fails to play out, then investors may be left wishing they left their portfolios without AmEx. But on balance, the outlook is for a stock that could beat a market that's likely to move sideways at best in 2002. Wahlgren covers financial markets for BusinessWeek Online in New York


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