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 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.