Founded in 1950, New York-based American Express (AXP) is a leading global financial services company offering card payment products and travel-related services to consumers and businesses across the globe. It is now the third largest player in the US in terms of card transaction volumes, after Visa (V) and MasterCard (MA). It also competes with other financial institutions that have credit card services like Discover Financial (DFS)and Capital One (COF).

What differentiates American Express from MasterCard and Visa is its relatively more affluent customer base, which it maintains by offering generous benefits and reward programs. Since American Express brings higher spending consumers to merchants, it can charge a higher commission (known as the interchange fee) on sales. Also, unlike Visa and MasterCard, American Express only issues charge and credit card products but not debit cards, which have been gaining widespread acceptance over the past couple of years. With these critical differences in mind, we explore the opportunities that lie ahead for American Express in an evolving macroeconomic environment.

Our price estimate is $47.16, which is just slightly higher than the current market price.

Impact of Regulatory Reforms

The Obama Administration in February 2010 passed the Credit Card Accountability, Responsibility and Disclosure Act, or the CARD Act which enforces more disclosure about interest rates, caps on service fees, grace periods and also makes it difficult for people under the age of 21 to obtain cards. All this is expected to negatively impact the growth in the number of cards in use but lead to lower net write-off rates and defaults by card members.

The Durbin Amendment, enacted in July 2010, granted the Fed the power to control the levels of this fee. In December, the Fed enforced one such limit - 12 cents per debit card transaction. While this adversely affects the two largest card payments-processing networks Visa and MasterCard, which also issue debit cards, we believe it presents upside opportunity for American Express as credit cards would gain prominence over debit cards, at least from the issuers' end.

Improving Economic Conditions

The macroeconomic conditions are improving in the US, albeit at a slow pace. The unemployment levels are still close to historical high levels but on a downward slope, declining from 9.8% in November 2010 to 9.4% in December 2010. Consumer spending has picked up and so have the corresponding card transactions.

Household purchases, which constitute about 70% of the economy, grew at 4.4% in December 2010, the highest since the first quarter of 2006.American Express' card delinquency rates (the proportion of outstanding balances past the due date to total balances) continues to decline month on month to 2.1% from 2.5% in the previous quarter. Charge-offs (the loans deemed uncollectible and hence, written-off) also declined from 5.2% to 4.4% over the same period. Improvements in macroeconomic conditions hint at more relaxed card-issuing criteria and higher credit limits.

If spending increases more than we currently forecast, this could improve our price estimate. Drag the trend line in the modifiable chart above to see the impact. For example, a 5% increase in annual spending in 2012 per customer translates to around a 2% improvement in our price estimate.

See our estimates for American Express.

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American Express Outlook Improves on Recovery in Spending originally appeared on BloggingStocks on Thu, 17 Feb 2011 13:20:00 EST. Please see our terms for use of feeds.

Continue reading Before the bell: Investors' caution reigns amid earnings season

Before the bell: Investors' caution reigns amid earnings season originally appeared on BloggingStocks on Thu, 22 Oct 2009 07:30:00 EST. Please see our terms for use of feeds.

Continue reading Interested in buying some General Motors stock?

Interested in buying some General Motors stock? originally appeared on BloggingStocks on Thu, 20 Aug 2009 18:10:00 EST. Please see our terms for use of feeds.

Continue reading Capital One reports a smaller-than-expected loss -- still a loss

Capital One reports a smaller-than-expected loss -- still a loss originally appeared on BloggingStocks on Fri, 24 Jul 2009 10:15:00 EST. Please see our terms for use of feeds.

With such uncertainty, following an absolute return strategy continues to offer investors the biggest bang for their buck. There is no sense in guessing where the market will be down the road.

Instead, buy cheap stocks and sell stocks that are expensive. Then blend the two approaches together in one portfolio and chances are you'll make money.

Even with a huge rally in stocks, the S&P 500 ended the second quarter with a year-to-date gain of 1.78%. That is a vast improvement compared to the 11% loss at the end of the first quarter, but it's a minimal return for taking risk in the stock market.

Investors need to do better -- and they can.

Continue reading Take a pass on these ten stocks

Take a pass on these ten stocks originally appeared on BloggingStocks on Sat, 18 Jul 2009 08:00:00 EST. Please see our terms for use of feeds.

Doomsday Scenario: Credit card problems, PE downsized, American workers lag originally appeared on BloggingStocks on Mon, 15 Jun 2009 17:00:00 EST. Please see our terms for use of feeds.

Continue reading Credit card crash: Small biz lender Advanta in trouble

Credit card crash: Small biz lender Advanta in trouble originally appeared on BloggingStocks on Tue, 12 May 2009 14:50:00 EST. Please see our terms for use of feeds.

Continue reading Doomsday Scenario: Empty offices, scary banks, collapsing credit cards

Doomsday Scenario: Empty offices, scary banks, collapsing credit cards originally appeared on BloggingStocks on Tue, 21 Apr 2009 18:00:00 EST. Please see our terms for use of feeds.

Capital One

Continue reading Capital One (COF) to acquire Chevy Chase Bank

Capital One (COF) to acquire Chevy Chase Bank originally appeared on BloggingStocks on Thu, 04 Dec 2008 16:40:00 EST. Please see our terms for use of feeds.

Banking analyst Meredith Whitney is credited with questioning assets on bank balance sheets given the collapse in the real estate market.

Taking advantage of a complete lack of information, Ms. Whitney triggered a massive collapse of trust in an industry by claiming that mortgage-backed securities were worth far less than what the market had perceived.

While she may have had a basis for her claims, her assessment was more sensational than factual. Mortgage-backed securities are quite complex instruments whereby loans are sliced, diced and packaged for sale to a global market.

With maturities extending 30 years into the future, it is unreasonable and unfair to assume that paybacks, even with high default rates will amount to what is currently priced into the market.

The lack of understanding of the underlying security or loans at the individual level has created uncertainty that has yet to be resolved.

For fans of the original "Star Wars" movie, think of the weakness in terms of attacking the Death Star. That one hole was exploited (we can debate the merits of doing so later) by Ms. Whitney and those like her.

Continue reading Next target for fear mongers: Credit cards

Next target for fear mongers: Credit cards originally appeared on BloggingStocks on Mon, 01 Dec 2008 17:00:00 EST. Please see our terms for use of feeds.

Reuters reports that Capital One Financial (NYSE: COF) reported that its profit tumbled 40% and its earnings came in 10 cents a share less than expected. Its loan losses spiked -- cutting into profits.

In particular, Capital One made $1.21 a share and analysts had expected $1.31. And its provision for losses more than doubled from the same period in 2007. According to PR Newswire, Capital One's provision increased 109% from $397 million to $829 million.

The problem? Consumers are not paying off their credit cards like they did when they were using their house as an ATM. With housing prices down 15% and three million foreclosures underway, consumers just can't afford to pay off their credit cards. And Capital One is expecting a big jump in bad debt. Its stock has fallen 4.9% after hours.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Capital One profit plunges 40% originally appeared on BloggingStocks on Thu, 17 Jul 2008 18:59:00 EST. Please see our terms for use of feeds.

MOST NOTEWORTHY:

• Lehman downgraded AbitibiBowater (NYSE: ABH) to Equal Weight from Overweight citing dilution from the recent $350M convertible offering, cost pressures, and a more cautious outlook near-term for pulp markets.
  
• JP Morgan cut GlaxoSmithKline (NYSE: GSK) and AstraZeneca (NYSE: AZN) to Underweight from Neutral on long-term earnings growth concerns.
  
• Keefe Bruyette lowered Capital One (NYSE: COF) to Underperform from Market Perform to reflect the company's credit outlook.

• Nokia (NYSE: NOK) was downgraded to Neutral from Buy at UBS and to Underweight from Overweight at JP Morgan.
  
• Textron (NYSE: TXT) was cut at Credit Suisse to Neutral from Outperform.
  
• Merriman downgraded Blue Coat Systems (NASDAQ: BCSI) to Neutral from Buy.

Analyst downgrades: ABH, GSK, AZN and COF originally appeared on BloggingStocks on Fri, 18 Apr 2008 11:05:00 EST. Please see our terms for use of feeds.

Continue reading Growing credit debt may not be good for credit card company Capital One

Growing credit debt may not be good for credit card company Capital One originally appeared on BloggingStocks on Thu, 10 Apr 2008 15:43:00 EST. Please see our terms for use of feeds.

After hitting a one-year high of $82.25 in June, the stock hit a one-year low of $37.41 in January. COF opened this morning at $51.65. So far today the stock has hit a low of $50.89 and a high of $54.46. As of 11:55, COF is trading at $51.85, up $0.36 (0.7%). The chart for COF looks bullish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bullish hedged play on this stock, I would consider an April bull-put credit spread below the $40 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.5% return in just one month as long as COF is above $40 at April expiration. Capital One would have to fall by more than 22% before we would start to lose money.

Continue reading Capital One (COF) gets a boost from Visa (V) IPO

Capital One (COF) gets a boost from Visa (V) IPO originally appeared on BloggingStocks on Wed, 19 Mar 2008 13:02:00 EST. Please see our terms for use of feeds.

MOST NOTEWORTHY:

• UBS downgraded shares of Discover (NYSE: DFS) and Capital One (NYSE: COF) to Sell from Neutral and American Express (NYSE: AXP) to Sell from Buy, as they believe a U.S.-led recession will lead to increased credit losses.
• Jefferies downgraded shares of VASCO Data Security (NASDAQ: VDSI) to Hold from Buy to reflect the company's exposure to the financial services market, as they believe 2008 will be a tough year for small companies selling into tightening IT budgets.
• Merriman lowered its rating on Bankrate (NASDAQ: RATE) to Neutral from Buy on valuation, as they believe the stock is pricing in upside from strong website traffic seen in January driven by refinance activity and Fed rate cuts. Citigroup downgraded shares to Hold from Buy on valuation, as they find the risk/reward less compelling at current levels.

• JP Morgan removed SanDisk (NASDAQ: SNDK) from its Top 3 Picks List.
• Goldman downgraded CSK Auto (NYSE: CAO) to Neutral from Buy and removed Google (GOOG) from its Conviction Buy List.
• Baird lowered Comerica (NYSE: CMA) to Neutral from Outperform.

Analyst downgrades: Banks, VDSI and RATE originally appeared on BloggingStocks on Mon, 04 Feb 2008 10:11:00 EST. Please see our terms for use of feeds.

The management at American Express (NYSE: AXP) must have hoped that its relatively high-end card holders might dodge much of the economic slowdown. It was not to be. According to The Wall Street Journal, "the card company said yesterday that it would take a $440 million pretax charge against fourth-quarter earnings as it sets aside more money to cover soured loans." The news and a warning from Capital One (NYSE: COF) showed that credit problems have moved beyond the mortgage market and into consumer credit.

American Express described its problems as "broad-based and sudden." So, part of the financial industry says the consumer pulled in very sharply in December, a sign that GDP may have already begun shrinking at the end of last year.

The consumer was the economy's last, best hope. He was needed to drive revenue in the retail and consumer goods markets. It appears now that his hibernation has begun in earnest.

Douglas A. McIntyre is an editor at 247wallst.com.

American Express takes on water originally appeared on BloggingStocks on Fri, 11 Jan 2008 08:50:00 EST. Please see our terms for use of feeds.

Capital One Financial Corp. (NYSE: COF) stock is falling this morning after the credit-card company said today that its 2007 earnings will not meet previous estimates, citing increased loan delinquencies and additional legal reserves in the fourth quarter. The company said it will take a $1.9 billion provision for loan losses in the fourth quarter, raising fears that the subprime mortgage crisis has hurt other credit classes. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on COF.

After hitting a one-year high of $83.84 in February, the stock hit a one-year low of $41.23 yesterday, which it has broken this morning. This morning, COF opened at $40.42. So far today the stock has hit a low of $38.85 and a high of $41.71. As of 10:45, COF is trading at $41.04, down $2.37 (-5.5%). The chart for COF looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a February bear-call credit spread above the $50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.5% return in 5 weeks as long as COF is below $50 at February expiration. capital One would have to rise by more than 22% before we would start to lose money.

Continue reading Capital One (COF) hits new 52-week low on revised forecast

Capital One (COF) hits new 52-week low on revised forecast originally appeared on BloggingStocks on Thu, 10 Jan 2008 12:46:00 EST. Please see our terms for use of feeds.

Target (NYSE: TGT) is trading down over 2% on disappointing December sales.

Macy's (NYSE: M) is up over 2% on strong same-store sales numbers.

Merrill Lynch (NYSE: MER) is off 3% on news that the investment bank may have to raise more money.

Capital One (NYSE: COF) is off about 9% on a downward revision in earnings.

Stocks may trade differently in the pre-market than they do in the regular session.

Douglas A. McIntyre is an editor at 247wallst.com.

Pre-market movers: TGT, MER, M originally appeared on BloggingStocks on Thu, 10 Jan 2008 08:44:00 EST. Please see our terms for use of feeds.

Capital One (NYSE: COF) announced that it expects to report earnings for the fourth quarter of 2007 of about 60 cents per share (diluted) and full year 2007 earnings of about $3.97 per share, below its prior expectation of "about $5.00 per share." According to CNN Money, the company "said it is taking a $1.9 billion provision for loan losses in the fourth quarter, including about $1.3 billion in charge-offs."

The news is particularly bad for those who had hoped default rates would be largely contained to the mortgage sector. Capital One is a significant provider of credit cards and auto loans.

There has been some hope that the consumer could help keep the economy afloat, if he was not stretched too thin. It appears that the final buttress that might hold GDP up is falling apart.

Douglas A. McIntyre is an editor at 247wallst.com.

Capital One's (COF) downsized forecast originally appeared on BloggingStocks on Thu, 10 Jan 2008 08:40:00 EST. Please see our terms for use of feeds.

We keep coming close to losing these companies that are fighting for their lives.

Yesterday we had First Marblehead (NYSE: FMD) (Cramer's Take) on student loans.

Is CIT (NYSE: CIT) (Cramer's Take) next with its student loan portfolio (as opposed to its mobile home portfolio and its subprime portfolio...sheesh!)?

We obviously had a giant problem with MBIA (NYSE: MBI) (Cramer's Take) over the amount of capital it needs to raise. Will it have to raise capital and cut the dividend?

Continue reading Cramer on BloggingStocks: More lenders on life support

Cramer on BloggingStocks: More lenders on life support originally appeared on BloggingStocks on Thu, 06 Dec 2007 09:00:00 EST. Please see our terms for use of feeds.