Can American Express Support These High Prices?

With shares of American Express (NYSE:AXP) trading around $65, is AXP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

American Express is a global service company. Its principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses worldwide. The company operates in four segments: U.S. Card Services, International Card Services, Global Commercial Services and Global Network & Merchant Services. Through these four segments, American Express is ready and able to prodive products and services consumers and businesses deem as essential to business process and operations.

T = Technicals on the Stock Chart are Strong

American Express has seen its fair share of volatility over the last decade. However, the stock has come up strongly from Financial Crisis lows and is now trading near all-time high and breakout price levels. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, American Express is trading above its rising key averages which signal bullish price action in the near-term.

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AXP

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of American Express options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

American Express Options

22.4%

80%

76%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

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Put IV Skew

Call IV Skew

April Options

Steep

Average

May Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on American Express’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for American Express look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-43.14%

5.83%

4.55%

10.31%

Revenue Growth (Y-O-Y)

5.15%

3.84%

4.56%

8.29%

Earnings Reaction

-1.58%

-2.96%

-3.53%

-0.81%

American Express has seen mostly increasing earnings and revenue over the last four quarters. From these figures, the markets have not been satisfied with American Express’s last four earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has American Express stock done relative to its peers, Visa (NYSE:V), MasterCard (NYSE:MA), Discover Financial Services (NYSE:DFS), and sector?

American Express

Visa

MasterCard

Discover

Sector

Year-to-Date Return

10.64%

5.89%

3.79%

8.4%

6.34%

American Express has been a relative performance leader year-to-date.

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Conclusion

American Express participates in a credit and efficient transaction field that is seeing incredible growth as consumers and businesses continue to adopt this technology. Earnings and revenue have seen modest growth over the last four quarters but investors have expected more. The stock is now trading near all-time high prices and has led its peers and sector by a wide margin, year-to-date. Look for American Express to continue to OUTPERFORM.

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