AMEX Analysis by Contrarian Edge

Vitaliy Katsenelson is the author of Active Value Investing and he also runs a blog called Contrarian Edge. His content is clear and always worth a read.

I just wanted to highlight one of his posts and report analyzing AMEX. Other companies he has looked at include Exxon, Supervalu and Jos A Bank.

It is dated Nov 12, but he lays out his reasoning in a way that anyone can understand and will benefit anyone trying to expand their circle of competence to the financial sector.

Read: AmEx as a Bank Holding Company

  • American Express is far riskier than it seems. I would disagree with Vitaliy’s original view that Amex has a good balance sheet. It sort of does but on the other hand it doesn’t because it depends on the secrutization markets. If it weren’t for the financing from the FedRes, it may have run into serious problems a few months ago. It is also likely that financing costs will go up significantly once the FedRes stops funding them. Although credit card companies can make up for the increased costs by jacking up rates, there may be government pressure to keep rates down:

    I know value investors tend to downplay macro views but if we just look at macro views for a sec, Amex is heavily exposed to the credit bust. So far credit card losses haven’t gotten out of control but it remains to be seen.

    Having said all that, the market is pricing in a very dire scenario for Amex and its valuation seems really low.

  • I agree with you on this. I only consider macroeconomics in a very general and broad sense but looking at the micro also suggests the same thing.

    I’ve had AMEX on my watchlist for over a year and never bought because of how far it would go down. I may be trying to time the market here but I would prefer to get in when the economy brightens up.

    I would much rather buy at $15 when the economy is recovering rather than buy at $15, see it drop below $10 and then up to $40. I could ignore the price and keep averaging down but there are disadvantages to that also.

  • Diogenes

    Disagree – The macro translates into the micro. I think you are better off long ADS and short Amex even at these levels. Here are my reasons –

    1) Relative to COF, DFS, ADS and the banks, Amex tops the chart on every single metric from 30/60/90 day delinquencies, roll-rates and charge offs. Also is the least efficient in collecting charged-off receivables

    2) Amex is way under reserved. Management low-balled provisions in 3Q because they didn’t want to raise capital. They had no reason to do so again in 4Q having converted to bank and taken money from the treasury. However they continue to do so. Additionally they are managing business and reserving assuming a 8-8.5% unemployment rate! We are already at 7.7% and likely higher within Amex’s target segment. At 10% which I think is a base case, they need an additional $9.2BN in provisions in 2009 – $2.2BN for charge cards and $7BN for cardmember lending. At those levels, you are looking at EPS < $1 for 2009 and probably for 2010 as well unless we are shocked by a sharp rebound in employment trends

    3) At $13/share they are still at 1.4x P/B excluding the TARP money relative to COF and DFS at << 0.5x. Considering that the other 2 are better reserved and have less dramatically deteriorating rates, its easy to see why I think Amex has more to go

    I am a buyer at $8-9/share

  • Diogenes

    By the way, FIN 46R when it goes into effect later in 2009 or early 2010 will require all card companies issuing ABS through master trusts to bring all off-balance sheet junk on-balance sheet and mark-up the provisions to realistic levels. While the bulls are hanging their hats on the government waiving capital raise to bring ratios bank in order, the alternative will result in a massive capital raise and the stock likely cratering to mid-single digits

  • Diogenes,
    Thanks for your thoughts. Definitely a lot more I can learn in order to hopefully understand financials one day.

Ready to try Old School Value?