American Express: An OK Quarter Overall-Minyanville

American Express: An OK Quarter Overall

John Succo Oct 23, 2007 10:15 am


		American Express had a pretty good quarter in a pretty bad environment.

The Bad

American Express (AXP) reported 3Q '07 EPS of $0.90 ($0.84 on an underlying basis) versus consensus; a lower recurring tax rate and lower operating expenses were offset by higher provisions. I calculate underlying earnings by excluding a $75 mln non-recurring tax benefit.
Provisions for loans (up 45% yoy) grew more than volumes (up 23% yoy) reflecting an increasingly conservative outlook; the provisioning rate rose 73 bp annually (to 4.6% of average loans).
- This makes it almost a clean sweep among the responsible banks and brokers—they have all raised provisioning. Clearly, the consumer is not doing great (but we knew that).

The Good

The company's results were strongest where it matters most. American Express derives 60% of group value from its network, which demands a higher multiple than its lending (20% of value) and other (20%) segments;
- Card-billed business grew an impressive 16% y/y in 3Q, while the reported discount rate (flat at 257 bp) continued to defy gravity (leaving me questioning how long it can maintain this pace).
Credit trends were benign; on a managed basis, the net write-off rate for cardmember lending (4.0%) was flat sequentially and in-line with forecasts.

Bottom-line

A pretty good quarter in a pretty bad environment. My guess, however, is that numbers will start coming down due to the higher provisioning costs. Assuming a 60-20-20 split among network, lending and other businesses, and valuing at historical multiples of 20X, 10X, and 15.5X forward earnings, I think the stock has, conservatively, about a 20% upside, which makes me think this is not one of the better long vol/short stock names out there.

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