Is American Express Heading In the Right Direction?

With shares of American Express Company (NYSE:AXP) trading at around $61.08, 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:

C = Catalyst for the Stock’s Movement

American Express reported Q4 EPS of $1.09 versus an expectation of $1.06. Revenue came in at $8.10 billion, which was in-line with estimates. If you include charges for restructuring, membership rewards, and cardmember services, then EPS really comes in at $0.56. However, this is still positive news. It’s usually not good news when a company has extra expenses, but in this case, it shows discipline. Any company that takes a long-term approach in this unpredictable economy is setting itself up for a manageable situation in the future.

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The biggest expense will be a restructuring charge of $400 million. The majority of this will go toward severance pay, but it will also go toward future operating expenses, necessary adjustments for more consumers moving online for banking, and growth initiatives. The second-largest expense will be $342 million for membership rewards. Coming in a distant third is cardmember services with a cost of $153 million. You might have noticed severance pay above. That’s because American Express is planning on cutting 5,400 jobs. The company has stated that it will add jobs as well, but there will be a drop of 4 to 6 percent for jobs overall in 2013. Cardmember spending rose 8 percent in Q4. There was a slight dip due to Hurricane Sandy, but spending rebounded nicely…

Now let’s take a look at the big picture for American Express:

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for American Express is weak. It’s also weaker than the debt-to-equity ratios for Capital One Financial (NYSE:COF) and Discover Financial Services (NYSE:DFS). The balance sheet for American Express is in awful condition. However, there is over $14.70 billion in operating cash flow, which helps ease the pain.

Debt-To-Equity

Cash

Long-Term Debt

AXP

3.32

$3.99 Billion

$60.30 Billion

COF

0.97

$6.73 Billion

$37.41 Billion

DFS

2.06

$12.49 Billion

$20.01 Billion

 

T = Technicals on the Stock Chart Are Strong

American Express has performed well over the past three years. It’s not likely that this type of performance will be repeated over the next three years, but there is still more upside potential.

1 Month

Year-To-Date

1 Year

3 Year

AXP

7.86%

7.07%

27.04%

55.00%

COF

6.66%

7.27%

30.73%

51.18%

DFS

0.47%

4.82%

58.16%

180.20%

 

At $61.08, American Express is currently trading above all its averages.

50-Day SMA

56.73

100-Day SMA

57.15

200-Day SMA

57.27

 

E = Earnings and Revenue Have Been Improving

Earnings and revenue have been improving since 2009. Annual EPS and revenue have also exceeded 2007 levels, which is impressive.

2007

2008

2009

2010

2011

Revenue ($)in billions

31.54

31.92

26.54

30.00

32.28

Diluted EPS ($)

3.34

2.32

1.54

3.35

4.12

 

We already know what happened this quarter. Now let’s take a look at past results as well.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

8.15

8.32

8.19

8.52

8.42

Diluted EPS ($)

1.03

1.02

1.07

1.15

1.09

 

T = Trends Support the Industry

As a society, we almost reached a point of financial responsibility in early 2009. Believe it or not, people stopped borrowing and began saving. However, stimulus programs restarted the economic engine and people embraced the high with open arms. This, in turn, led to more borrowing, which was a plus for companies like American Express. The best news here is that even if things turn south again, American Express has a higher-end clientele. Many of these consumers made a comeback over the past few years through investments. Many of them have also booked profits. They didn’t want to get greedy as they did in 2008. Therefore, if the economy tanks, American Express might have a chance at staying afloat better than its competitors. In all likelihood, the industry will continue to trade together, but at least American Express will have the strongest buoy potential.  

Conclusion

American Express is taking a wise approach by recognizing charges. This kind of fiscal responsibility is difficult to find and good to see. American Express has a profit margin of 17.12 percent, an ROE of 26.81 percent, and a Forward P/E of 12.92. It also yields 1.30 percent. Debt is still a concern, but it should be should be reduced over the next few years.

American Express is a cautious OUTPERFORM.

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