AmEx Stock May Be Bullish Bet on U.S. Spending: EcoPulse

American Express Co. shares are poised to rally as analysts’ earnings forecasts anticipate continued expansion in U.S. consumption.

As the biggest U.S. credit-card issuer by purchases, American Express could attract investment amid an acceleration in purchases by both consumer and business customers, said Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in New York, which helps manage about $1.5 billion in assets.

That’s because American Express is very sensitive to the economy, so further growth should “send investors into this stock,” and it could experience an “outsized positive impact” if gross domestic product accelerates faster than projected, he said.

The New York-based company also is “definitely worth a look” as the differential between its stock performance and analysts’ earnings forecasts -- which historically track each other -- is the widest since February 2013, Ghriskey said. Since 2008, every time the relative price performance has lagged behind relative earnings, “it’s been a great buying opportunity,” which “might last for some time,” he said.

Shares of American Express have trailed the Standard & Poor’s 500 Index by about 10 percentage points since June 12, while analysts’ forward-looking consensus estimate for earnings has kept pace with the broader market.

‘Good Play’

The company provides a “good play” on economic growth because consumers and corporations typically charge discretionary purchases, and a majority of its revenue is derived directly from the amount cardholders spend, said Sanjay Sakhrani, a New York-based analyst at Keefe, Bruyette & Woods Inc. He forecasts American Express’ global billed business -- a gauge of spending -- will expand 8 percent in 2014 and 2015, up from 7 percent last year, as the U.S. “continues improving on the margin.”

There’s a “pretty clear correlation” between the U.S. billed business and “discretionary GDP growth,” Joshua Silverman, president of the company’s U.S. consumer services, said at a Sept. 8 conference hosted by Barclays Plc.

Another “unique characteristic” is American Express’s significant exposure to travel activity for individual and corporate cardholders, which “should give it a little more juice,” said Walter Todd, who oversees about $1 billion as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina.

Hotel-Booking Record

After a summer of record hotel bookings, the company could see additional gains from travel-related expenditures into 2015, he said.

The stock has been disappointing so far this year, dragged down in part by “tepid” quarterly results, Todd said. American Express said July 29 that total revenue, net of interest expenses, was almost $8.7 billion in the second quarter, while earnings were $1.38 a share, not including gains related to a spinoff of its business-travel unit. These results were on par with the consensus of analysts’ forecasts, after the company missed sales estimates in the prior quarter.

Many investors lost interest amid weak measures of consumer spending earlier this year and a slowdown in housing, Ghriskey said. Retail sales rose 0.6 percent in August from the prior month, the fastest pace since April and matching the median forecast of economists surveyed by Bloomberg, based on figures released today by the Commerce Department.

Antitrust Lawsuit

In addition, a pending case in federal court could be a headwind to the stock, Sakhrani said. At issue are company rules that help protect American Express’s fee structure. If these violate antitrust law, as the Department of Justice alleges, it could have an impact on revenue.

American Express shares historically have traded at a premium to the market, though the recent sluggishness has dragged down its valuation. The stock is currently at about 14 times the price-to-earnings ratio, compared with a multiple of 15 for the S&P 500, according to Sakhrani’s calculations. For Ghriskey, this suggests there’s a “favorable backdrop for the stock to move higher,” while Todd said this valuation isn’t “a tailwind anymore, but it’s not a headwind, either.”

Though American Express has lagged behind the broader market after trading to a relative high on March 7, it has remained in an uptrend since mid-2009, according to Jim Stellakis, founder and director of research at Technical Alpha Inc. in Greenwich, Connecticut. When shares have traded down to a range of about $82 to $86 this year, it’s been “a natural area where investors have bought.”

Bullish Signal

If the stock holds the key support level where it’s trading now relative to the S&P 500, this would be a bullish signal to so-called swing traders, who act on short-term price momentum, Stellakis said. The stock closed at $88.42 yesterday.

Todd’s firm sees it as an attractive holding because of its “reasonable” valuation and solid earnings growth over time, along with the backdrop of improved business-related spending and consumers who are slowly emerging from a “hunker-down mode,” he said. “AmEx is a good anchor for a portfolio in the financial space.”

The company counts Warren Buffett’s Berkshire Hathaway Inc. as its largest shareholder, with a stake of more than 14 percent.

While some investors may be looking to other cyclical companies for a bet on accelerating economic growth, Todd and his colleagues “love the consistency” of American Express, particularly as its stock has outpaced the S&P 500 by almost 14 percentage points since the end of 2012, he said.

If history serves as precedent, Americans could feel more willing and able to make discretionary purchases again after what’s been a prolonged period of “overly cautious” behavior, Ghriskey said. That’s why investors should place bets now, before that materializes.

“Eventually we’ll see a bounce back in consumer spending and that should really benefit this stock,” he said.