Markets & Finance

Marcial: American Express: A Beaten-Down Bargain?


The charge-card giant has seen its shares tumble along with the rest of the financial services group—an undeserved fate, according to some pros

Hordes of investors are bailing out of American Express (AXP): Its stock has cratered from a 52-week high of 63.63 on Oct. 11, 2007, to 38 on Sept. 5. Some of the major institutions, such as Fidelity Management, Capital Research Global, and Oppenheimer Funds (OPY), have unloaded huge amounts of stock. But here's one piece of advice: Don't follow the crowd rushing for the exits. Go the opposite way and grab the opportunity to buy shares of the credit-card behemoth at its current heavily discounted price.

AmEx is a vivid example of how a highflier can plunge no matter how fine a company it is. But that's how the market creates tempting opportunities. In AmEx's case, the company became partly responsible for its own market woes when CEO Kenneth Chenault frankly warned analysts in early August that the slowing economy, high energy costs, and wealth shrinkage due to the housing meltdown indicated tough times ahead.

That prompted analysts to downgrade the stock. Of the 19 who follow AmEx, three quickly changed their recommendation to sell and 10 to neutral. But not everyone went negative: Six analysts have kept their buy rating, with 12-month price targets ranging from 40 to 55.

Sanguine bulls

Here's a sampling of what those with a cautious outlook have to say. "The wide-ranging effects of the housing downturn are highlighted by the worsening of U.S. Cards' [an AmEx division] credit quality," said Meredth Whitney of Oppenheimer in a note to clients. As a result, she says, AmEx's affluent customers "have seen credit deterioration beyond expectations." She rates AmEx "perform," which is equivalent to staying neutral on the stock. Also cautious is Kenneth Bruce, an analyst at Merrill Lynch (MER) who has done banking for AmEx. He rates the stock underperform and warned clients that it hasn't yet fully reflected these problems.

But the bulls remain charged up on AmEx and aren't too perturbed by the recent weakness in the shares. "As soon as the economy improves, and it will, AmEx will pick up way ahead of the banks and other financial institutions that have been under siege," says Lewis Rabinowitz, a money manager at investment firm Collins Stewart. The company's business model is intact and doing well, he adds, unlike those at many other embattled financial institutions. Rabinowitz, whose clients own shares, expects the stock will climb back to its 52-week high of 63 once the economy regains its footing.

In fact, AmEx is the least risky when compared with its peers in the consumer finance sector, says Roy Ophir, director of research at independent investment research firm Matrix USA, which rates AmEx a buy based on its quantitative and fundamental analyses. AmEx has demonstrated "good economic performance with an exceptionally low-risk profile, partly because of its high cash-flow generation," says Ophir. Given the company's strong sales growth profile, high profit margins, and strong cash flow, the stock is a buy, he argues.

Boffo B2B

One thing going for AmEx, of course, is its highly visible worldwide brand. Patrick Schumann, an analyst at investment firm Edward Jones, says the company's strong brand identity, particularly among the higher-income demographic, should enable it to gain market share from its credit-card competitors. He notes that the average spending for AmEx's core customers is roughly three to five times higher than that of its rivals.

One solid market for AmEx is its global business-to-business investments, where Schumann expects the company to spend more of its time and capital. This is where AmEx is well-positioned to see expanded growth, he says.

With the U.S. and some parts of Western Europe's markets maturing, AmEx is continuing to expand globally, with increasing attention to emerging markets. "International markets will represent an above-average growth platform for the credit-card industry," says Schumann, and for AmEx, he says the shift overseas will help achieve its goals of 8% revenue growth, 12% to 15% earnings-per-share growth, and a return on equity of 33% to 36%. Schumann also expects AmEx to distribute some 65% of its cash flow to shareholders through share repurchases and a possible hike in its dividend.

price-earnings plummet

Amid the prevailing pessimism on the Street about AmEx's shares, they are now deeply undervalued since they started cascading down to near their 52-week low of 35 in July. Take a look at AmEx's price-earnings multiple. Trading at about 13.3 times Schumann's 2009 earnings estimate of $2.85 a share, the stock is selling way below its average price-earnings ratio of 20 in the past 10 years. Schumann's 2009 estimate is below AmEx's earnings of $3.36 in 2007. For 2008. Schumann expects $2.64, reflecting the economic slowdown's impact that AmEx CEO Chenault warned about.

Clearly, AmEx is an example of how a one-time Wall Street darling has fallen—hard, in spite of its solid fundamentals. The consumer finance behemoth's strong growth prospects, solid credit ratings, and shareholder equity of about $10 billion should encourage long-term investors to either hold on or buy shares, assert the bulls.

So perhaps it's time to join the frequent-buyer program. It may well be that people who are prepared to become members of AmEx's long-term investors "club" will reap handsome rewards.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.


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