American Express Set To Touch $66 By 2013

By Robert Gordon

American Express Company (AXP) is one of the world's leading financial companies, with its ubiquitous credit and non credit cards. It has two major divisions: all things card-related, and everything else. That "everything else" is a leading travel agency, and a publishing company. The credit card company is the fourth largest in the world.

AXP became a bank holding company in late 2008, in order to take advantage of the government's TARP bailout loans, of which AXP received a little under $4 billion. The amount has been repaid in full. AXP had long owned a small savings bank, but the assets of that bank made up a small fraction of AXP's assets. By including all the assets of the company under a bank holding company, AXP was eligible for more TARP money.

AXP stock was trading recently at about $48 per share, and, as we predicted had a great 2011. Its 52-week range is from $53.80 to $41.30, and it has a market capitalization of $56.2 billion. It has a P/E of 12.1 and pays a quarterly dividend of $0.18, for an annual yield of 1.5%

AXP has been recovering nicely since the economic depression caused 2009 to be AXP's lowest earnings per share since recessionary 2001. AXP's net per share in 2010 was $3.35, more than double the $1.54 reported in 2009. More recently, in its third quarter of 2011, AXP reported revenues were up 9% year over year to $7.57 billion, and profits were up 14%, to $1.23 billion, or $1.03 per share.

Helping to drive the recent surge in earnings has been AXP's ability to reduce loan loss reserves. For instance, in the third quarter of 2010, it set aside $373 million, and in the third quarter of 2011, its loan loss provision was $249 million. Further declines are likely; AXP's typical card holder is a higher income individual, and less impacted by a recessionary economy than the population at large is.

This chart demonstrates how AXP's charge off and delinquency rates are substantially lower than other large credit and charge card issuers.

Company ticker	Net charge off % Oct. 2011	Net charge off % Sept. 2011	Delinquency rate % Oct. 2011	Delinquency rate % Sept. 2011
BAC	5.98	5.99	3.97	3.99
JPM	4.18	4.13	2.55	2.53
DFS	3.26	3.17	2.48	2.5
AXP	2.3	2.6	1.5	1.5
C	5.66	5.87	3.26	3.3
COF	3.96	3.9	3.73	3.6

AXP has shown an interest as a player in the online loyalty payments industry. In 2011, it purchased Sometrics for $30 million; this added to AXP's 2011, $660 million purchase of Loyalty Partner gives AXP a significant European and Asian platform in that sector.

A big issue I have with AXP is not only did it contribute less to its reserve against bad loans in the third quarter than in the previous year; it actually removed some $1.5 billion from its reserve over the course of 2011, and converted that into pre tax earnings. Obviously, this cannot continue, and earnings for the year include an after tax “one time” boost of just over $1 billion from the release of reserves.

I have concerns about AXP's balance sheet as well. It carries nearly $70 billion in long term debt, the interest on which is covered less than three times earnings. That debt comprises 79% of capitalization. Rating services still rate AXP debt as low investment grade, yet that debt does impact AXP's flexibility. As of year end 2010, AXP's pension obligations were also underfunded by about $400 million.

Not all is dire with AXP though; far from it. Solid revenue growth both from new accounts and higher spending per account continues with the economic recovery. AXP is using its cash flow to invest further in its business for the long run. The company has a long history of sharing that cash flow with shareholders. Historically, dividends have averaged about 20% of earnings. The company has retired some 350 million shares of stock in recently years, and has spent nearly $2 billion this year buying back stock.

Rare is a company with more persuasive institutional support. Warren Buffett's Berkshire Hathaway Inc. (BRK.A) owns 13% of AXP's outstanding stock, or 151.6 million shares. Mario Gabelli owns over 4 million shares, and James Barrow has some 26 million shares. The mean analyst rating is a strong 2.1. The mean target of the 19 analysts covering AXP is $56.50 per share, which would be about a 17% bump from today's price.

I like certain banks, such as U.S. Bancorp (USB) and Fifth Third Bancorp (FITB) more over the next 12 months than AXP. I believe that earnings comparisons during 2012 will be difficult for AXP due to the manipulation of its loss reserve funds during 2011. Looking beyond 2012, however, and assuming no major macroeconomic setbacks, and if AXP can take advantage of the e-commerce investments it has made, I can see the stock trading at a substantial, earnings driven premium to today's price. Its pre recession, 2007 high point was nearly $66 per share, and that is my 2013 target for the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.