Is American Express (AXP) Risking Its Cache in Current Treatment of Cardholders?

Like most stocks right now there is simply no quit in American Express (AXP, Financial) no matter the valuation... even as I said I can now see the case for a bullish BUSINESS case a few weeks ago [Apr 24: American Express Not too Shabby Earnings; It's Not Capital One Financial (COF) or Discover Financial (DFS)] I did have a valuation argument against it at $22. Well, a few weeks later we are now approaching $27. Despite a "good" quarter analysts only bumped up 2009 estimates from $0.79 to $0.82. So at $22 we went from forward PE of 27 when I wrote the last piece to 33 today. This is just part and parcel with the entire market, and why I am just marveling at the propensity to people to buy almost anything, at any price. I realize the argument is "peak earnings power" some out year like 2011+... but if we are going to value companies on some earnings power 2,3,4 years out why should they ever go down during downturns in the economy? Let's just leave them at their 52 week highs and scoff at downturns, saying it's temporary and if you look 4 years out the full round trip will be made back to previous earnings power. I am not picking on American Express - this is the whole market right now.


But specific to this sector, even as the troubled American consumers moves from credit to debit [May 2: WSJ - Debit Card Use Overtakes Credit], even as charge off rates increase ever upward

Credit card companies are facing a difficult second quarter as card losses increase and cardholders fall further behind on payments, said a report released Monday by Fitch Ratings. Consistently high unemployment figures and a decline in business in the first quarter point to hard times for credit card companies for this year and into 2010, said Meghan Crowe, senior director at Fitch.... investors cannot get enough of the credit card love.

Came across an interesting piece in the LA Times about how part of the bull story for American Express; the reduction in its outstanding portfolio could cause a backlash. [Feb 24, 2009: American Express to Customers to its Customers: Please Go Away. Here's $300 to Spur You to Leave] I'm not sure how incensed consumers somewhat bullyed into using their credit cards less is a good thing for the economy but I'm sure a green shoot / mustard seed can somehow be spun. Feel free to try.

What does AmEx want? That's a question American Express cardholders are asking more and more these days as the company turns the screws on long-standing customers and seems determined to show as many as possible the door. AmEx, which pocketed $3.4 billion in bailout cash from taxpayers, seems to have been especially successful at making customers feel unwelcome. I wrote Sunday about a Los Angeles man who had his AmEx credit limit slashed twice by the company and then had his card canceled, all because of a "serious delinquency" in his credit file that apparently no one but AmEx could see. (here is the link to the original piece the reporter wrote about on this specific subject) I've since heard from numerous others who related similar experiences, including some who said AmEx even demanded that they send in copies of their tax returns if they wanted to keep their accounts -- a notion so outlandish that I was sure it had to be a scam.I asked about the reports I'd heard of AmEx customers being asked by the company to fax in their income tax returns. This couldn't be a legitimate request, right? Wrong. "In isolated cases, we will request that a card member provide us with additional information, including tax returns, in order to verify the spending capabilities of that card member," Fish said. If a cardholder declines to share such info -- and who wouldn't? -- she said that person's card might be canceled or its use could be suspended until the balance was paid down. And demonstrating that AmEx isn't just pushing around middle-class cardholders, I spoke the other day with Beverly Hills resident James B. Davis, who runs a publishing company with about $16 million in annual sales. He said he holds three AmEx Platinum cards, one for personal use and two for business. Davis, 61, recently received a letter from AmEx saying it was canceling a benefit allowing him to carry an extended balance on certain travel expenses. It said this was due to an unspecified problem with his credit file. "I have no debt -- zero," Davis told me. "So I called up my credit file and went through all 40 pages of it. I kept seeing 'Account in good standing,' 'Account in good standing.' Every account was in good shape." He said he finally found a single instance when he was late with a MasterCard payment -- about three years ago. "I can't believe they were going after me for this," Davis said. "I'm the sort of customer who buys cars on his American Express card." Worse, he said that when he contacted the company to find out what was going on, all he got was a lot of unhelpful mumbo-jumbo from service reps. This is a customer, mind you, whose credit limit runs in the hundreds of thousands of dollars.

I guess the $300 dollar offer to close your AMEX account was simply the carrot; behind the scenes there have been a lot of sticks offered in plentiful amount. It is good to be in nearly competition free niches - sort of like the oligarchs.


All part of the great resurgence of the US consumer - green shoots, coming to an economic recovery near you.


No position


Trader Mark

www.fundmymutualfund.com