AmEx Earnings Forecast Resiliency Among U.S. Consumers
Shares of American Express Co. (AXP) are poised to rally as analysts signal its earnings growth will outpace companies in the Standard & Poor’s 500 Index, even as investors have yet to reflect such optimism.
The stock -- which closed at $57.67 yesterday -- is still 12 percent below its 2007 high of $65.55, even though the New York-based company is more profitable and consumers are in “better shape” than five years ago, said David Yucius, who oversees $250 million in assets as president of Aurora Investment Counsel in Atlanta. The company’s shares peaked five months before the 18-month recession began in December 2007.
“While the stock is not the most expensive it’s been, it may not be the cheapest, either,” Yucius said. It probably could rally into the $60 range “without breaking too much sweat.”
As the biggest U.S. credit-card issuer by purchases, American Express is a “good proxy” of investor sentiment about discretionary spending, particularly among high-income Americans, Yucius said. That’s because its revenue is derived directly from the amount cardholders charge, he added.
It also “owns,” or is responsible for, the credit risk associated with some of the purchases on its cards, said Sanjay Sakhrani, an analyst in New York at Keefe Bruyette & Woods Inc.
Consumer spending in the U.S. climbed at a 1.4 percent rate in the third quarter, the smallest gain in more than a year and down from a previously reported 2 percent advance, according to data released Nov. 29 by the Commerce Department.
The key to American Express’s outperformance is a resolution in the impass between Congress and President Barack Obama on more than $600 billion in higher taxes and spending cuts scheduled to take effect in January 2013. This has been a drag on investor optimism, partly because the company’s customers -- affluent consumers who typically earn more than $100,000 and corporations both small and global -- “arguably are disproportionately affected by potential tax increases,” Sakhrani said.
American Express has lagged behind the S&P 500 by 7.1 percentage points since July 6 as the analysts’ forward-looking consensus estimate for earnings has outpaced the stock benchmark by 2.9 percentage points. While the stock’s performance historically has tracked earnings forecasts on a relative basis, this relationship has collapsed recently. That’s one reason why “American Express presents an interesting opportunity for investors right now,” Sakhrani said.
The credit-card issuer’s net income rose to $1.09 a share in the three months ended Sept. 30 from $1.03 a year earlier, the company reported Oct. 17, matching analysts’ estimates.
If the stock trades above the relative peak of Oct. 11 -- six days before the company reported third-quarter results -- this would signal investor sentiment toward the stock is becoming more bullish, said Jim Stellakis, founder and director of research at New York-based research company Technical Alpha Inc. and a chartered market technician. Since mid-October, the shares have been “tracking the broader market,” a reflection of investor indifference.
Even if Congress and Obama can reach an agreement, the result might be only temporary outperformance for American Express shares, according to Lance Roberts, who oversees $500 million as chief executive officer of Streettalk Advisors LLC in Houston.
Any “initial pop” probably would be psychological, rather than driven by fundamentals, because the company’s “top-line sales have been decelerating” this year as sluggish growth in the U.S. and a recession in the 17-nation euro area hurts earnings and profit margins, he said.
An agreement that includes higher taxes would restrain consumer spending, which also could cause American Express to start “under-earning” the market, Roberts said, adding that his fund has never owned shares of the company.
When the relationship between American Express’s stock price and earnings estimates detached in the past, the shares rebounded to catch back up with the analysts’ forecasts, he said. That occurred earlier this year and in 2011 as investors anticipated aggressive monetary policy from the Federal Reserve, creating a bullish influence on their asset-allocation decisions.
“This time could be different,” however, because there’s a diminishing impact from the Fed’s third round of quantitative easing, announced Sept. 13, and future policy action, Roberts said. The central bank said yesterday it will expand its asset- purchase program to buy $45 billion of Treasury securities a month starting in January.
One question investors are asking themselves is “how much to pay for earnings growth that’s driven by operating leverage” from lower expenses, which is “finite,” Sakhrani said. While they await more substantial signs of economic improvement, American Express shares seem “somewhat under-appreciated.”
The stock is trading at about 12 times earnings on a forward-looking basis, which compares with a historical average multiple of 15.5 since January 2000, said Sakhrani, who maintains an “outperform” recommendation on the company.
Even though the U.S. expansion is slow, “we’re not in a 2007-era precipice” and the next three to five years probably will “look at least as good as the last three to five years,” Yucius said. His fund doesn’t currently hold shares of American Express, though the consensus analysts’ earnings estimates of $4.37 this year and $4.71 for 2013 “at least support” the 2007 share-price high, he said.
“This stock has the financial characteristics that pass our screens as growth-at-a-reasonable-price investors.”
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