American Express thunders past rivals
Shares of the credit card company outperforming those of Citigroup, Bank of America and Wells Fargo.
By Dan Freed, TheStreet.com
Shares are up 11% in the last five days and nearly 15% during the past month, outperforming Citigroup, Bank of America, Wells Fargo and Capital One Financial as well as credit card companies like Visa and Mastercard, which don't have consumer loan exposure but have been doing well as customers rely on credit.
Year-over-year comparisons look far better for credit card balances now because of gas prices were lower during last year’s fourth quarter, according to Chris Brendler, analyst at Stifel Nicolaus. The weak dollar, especially compared to its strength a year ago, is also contributing to improved revenue, Brendler says.
"Stocks tend to be sensitive to the top line and spending trends," says Brendler, though this effect is less pronounced for American Express than other card companies.
More important for American Express, he says, is that it has better control over its loan portfolio, which "has gone from one of the worst performers last year to one of the best performers this year in terms of delinquency trends and losses as well."
Brendler also notes that American Express is better positioned against tough new consumer protection laws because it relies on "penalty fee income" less than competitors. He upgraded the stock to “buy” from “hold” on Oct. 26, slapping a $50 price target on the name.
Longer-term, he even thinks American Express could turn out to be an acquisition candidate for a large U.S. or European bank. Such a deal would make sense, Brendler says, because American Express still relies too heavily on capital markets rather than deposit-based funding, a strategy that has proved dangerous since the collapse of Bear Stearns last year.
Another American Express bull is CLSA analyst Craig Maurer, who has had an “outperform” rating on the stock since Jan. 27. Maurer raised his price target to $42 the day after American Express's third-quarter report, citing, among other factors, heavy exposure to California, Florida and Nevada. In a recent report, he wrote that, because these states' economies ran into trouble early, they enabled American Express's charge-offs to peak ahead of other credit card lenders.
Despite the positive sentiment on American Express, much, of course, depends upon one's view of the health of the economy as a whole. Brendler acknowledged in his report that "the most important facet of our bullish outlook is our increased optimism about the economy and the related impact on credit card trends."
By contrast, Sandler O'Neill & Partners analyst Michael Taiano has a “hold” rating on American Express shares, arguing the valuation "already seems to reflect high expectations of normalized earnings" in a note to clients.
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Consumers are very status conscious in Asia, Africa and other emerging-market areas. This is especially true in China.
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