Saturday, April 25, 2009

Re-analyzing American Express

I was indeed on the wrong side of the AXP trade on Thursday and Friday. I wanted until the last minute on Thursday to pull the trigger on an options strangle position and felt extremely confident. The numbers came in and I thought I was gold. But the information was spun in such a way that investors flocked to the buy window. The headlines read "American Express Blows Away Expectations".

Did they really? Well, if the stock move on Friday was any indication, they sure did.

What AmEx has going for them is excellent business management. They recognized the problems early on and made a significant cut in their work force and cut other key spending measures. They knew the numbers would be bad so they set analysts expectations extremely low while kicking the people that got them record earnings last year, out of the back door.

Lets look at the numbers a little closer.
  • Revenues down 18% from the previous quarter
  • Net Income (at .31/shr) down 64% from last year
  • Excluding one time revenues from MC and Visa, net income was .20/shr, down about 80% from last year.
  • Transaction volume down a massive 16% from last year
  • Charge offs (defaulted payments) were 8.5% which is 100% higher than last year. AmEx itself believes this number will go up to 10% by next quarter results.

But, AmEx management pulled the rabbit out of the hat. AmEx has tremendous brand name and they are just trying to survive this recession by cutting jobs. Good management, right?

Well, it is except AmEx is shooting themselves in the foot. The main reason for the massive decreases in transaction volume, net income and revenues is .... unemployment. As it goes higher, AmEx's numbers go lower. As AmEx's numbers go lower, they lay off more people helping to increase unemployment.

AmEx is feeding the monster which is cutting into their earnings. Yet, the stock rises 20% on the "good news" of its quarterly report.

Sure the company made money but growth is no longer in the picture. The numbers will continue to decline and no matter how low the analysts can take estimates, the picture is not rosy for AmEx.


  1. You'll get another chance on MA next week.

  2. MA is a different animal. No way I would short MA or Visa. They are not exposed to credit defaults like AmEx.

  3. Beaamer, what I think you are describing with amex is a 'tragedy of the commons'. Here's how it works:

    Amex laying off hundreds (or even thousands) doesn't meaningfully contribute to their losing revenue. Say they layoff 1000 -- that's a drop in the bucket of overall unemployment.

    It's in their best interest to lay off employees to trim costs. But it's also in the interest of every other employer to do that. The net result is that so many people are unemployed, the spending dries up and Amex (and every other company) experiences lower revenues.

    Everyone acting in their own best interest, rationally, creates a problem that affects everyone.