American Express Stock: Buy, Sell, or Stay Away?

American Express (NYSE:AXP) reported 2nd Quarter earnings recently and beat on earnings but missed on revenue.  Earnings per share of $1.15 topped a Thomson Reuters poll of analyst expectations for $1.09.  In another positive note, despite pretty grim economic conditions of late, the $1.15 beat 2011 2nd Quarter earnings of $1.10.

Revenue of $7.87 Billion was also up from last year’s $7.62 Billion, but missed consensus estimates from the Street’s wizards of analytical wisdom of $8.1 Billion.

So what’s the deal with AMEX going forward?  Is it a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

H = High Quality Pipeline

You don’t normally think of a credit card company having a product pipeline but in reality AMEX does.  Since they are not tied in with traditional banks they missed out on the direct debit card explosion that has helped Visa (NYSE:V) and MasterCard (NYSE:MA).  Although late to the came they recently began rolling out a product they are hyping as a digital wallet, called Serve.  It’s already on Facebook.  It’s a prepaid service that allows users to send money, shop online, or get cash, all through a smartphone application.  Company management thinks Serve can go beyond the debit card payment market and successfully compete with PayPal (NASDAQ:EBAY).

With Serve in place for the consumer and the small business segment, AMEX recently announced a new payment platform for medium and large businesses called, PAYVE.  Right now this segment suffers through a confusing array of payment solutions from old-fashioned check cutting, to ACH transfers, to International wire transfers.  PAYVE is supposed to change all that with a single electronic or card payment system that is purported to be user-friendly, transparent, and efficient.  We’ll see.

PAYVE was announced at the end of June and only a few months prior the company introduced another payment solution aimed at e-Commerce transactions.  Partnering with Transaction Network Services, thenew American Express Payment Gateway will manage the entire transaction process for the merchant so they can focus on other aspects of their business.

Finally, you have probably seen prophetic announcements of the coming demise of the credit card.  What that is all about is the upcoming release of something called the Isis Mobile Wallet.  Isis is a joint venture from Verizon (NYSE:VZ), AT&T (NYSE:T), and T-Mobile to put a payment application on selected smart phones.  So going forward, all you have to do is tap your phone on some fancy sensor and you’re done.  Amex has joined the party and their US consumer cards and Serve cards will be in the Isis wallet, as will Visa and MasterCard from certain banks.

E = Equity to Debt Ratio is Close to Zero

Here is where AMEX gets scary.  Their current debt to equity ratio is 3.04, or 304%.  While it is a good sign that the recent Quarter results showed total debt of $56 Billion which was down from $60 Billion, which is still a lot of debt.  Why does AMEX have so much debt when competitors Visa and MasterCard have none?

What some don’t realize is Visa and MasterCard do not actually issue credit cards, while American Express does.  In addition, AMEX has other consumer and commercial business offerings such as travel services and insurance.  Visa and MasterCard are strictly payment processors for cards issued by individual banks.  While Amex and the issuing banks face bad debt risk, Visa and MasterCard do not.

In addition, AMEX relies on its own network for all its offerings and they have incurred debt acquiring various companies to add functionality to their network platforms, such as the recently introduced Serve digital wallet.

E = Earnings are Increasing Quarter over Quarter

AMEX didn’t quite make the cut here over the last five quarters, but considering the times they deserve a little slack.  The Quarter just announced had EPS of $1.15; the 1st Quarter of 2012 EPS came in at $1.07; the 4th Quarter of 2011 EPS was $1.03; and the big miss was EPS of $1.04 in the 3rd Quarter of 2011.  Not bad.

T = Trends Support the Industry in which the Company Operates

Amex has strong trend winds at its back.  Plastic money already dominates with the US consumer and that trend is going global.  Online shopping is exploding and you can’t use cash or check on the Net.

Mobile technology is another exploding trend and the coming ability to pay anybody from anywhere with your smartphone bodes well for Amex going forward, as will electronic business to business payment platforms.

Finally, despite conventional wisdom forecasting doom for the financial industry from recent legislative initiatives, AMEX will actually benefit in some ways.  First, one of the company’s biggest advantages is its “closed loop network” which simply means AMEX controls the entire value chain in credit card payment transactions.  They issue the cards and they reap the full benefit of transaction fees.  Amex serves merchants and consumers directly while Visa and MasterCard serves large financial institutions and shares transaction fees with them.  However, Amex also takes the risk of defaults.  The Credit Card Accountability, Responsibility and Disclosure (CARD) Act, enforces more consumer disclosure and some caps on fees in the first year, but analysts say the net effect longer term will be lower bad debt write-offs and defaults.  This will directly benefit Amex, but not Visa and MasterCard.


Although Amex has a lot going for it, you know what they say about those who ignore history.  In 2008 Amex was carrying about $52 Billion in debt when the Lehman event sent us all into hiding.  The stock price dropped 80% by the time the market finally bottomed in March of 2009.  During that period the prophets of doom predicted the end of the line for Amex because of that debt load.

They survived, but with $56 Billion in debt now on the books, can they survive another crash?  The safest play here is STAY AWAY, but if you don’t see a return to the days of a barter economy, Amex deserves at least a spot on your WAIT and SEE list.

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