It could be a long time before American Express regains its credit throne. CEO Ken Chenault alluded to it himself, predicting further weakness in coming quarters because of economic malaise.
But it comes as no surprise to us.
We've been saying the same thing for months. Ignore American Express (AXP) stock because of its exposure to consumer debt. But no one listened.
AXP will be fine, they said. You're blowing the consumer issue out of proportion. "Ian Cooper has no brain," said one reader.
But we were right.
American Express just posted a Q2 profit that fell 38%, well below Street forecasts, as consumer spending slowed and the number of loans that were written off increased beyond expectations.
For Q2, the company posted net income of $653 million, or 56 cents a share, as compared to the $1.06 billion, or 88 cents per share posted last year. Analysts expected 83 cents this time around. Net loan write offs came in at 5.3%, as compared to 2.9% year over year.
The company also said the weakened economy would not longer allow it to attain a 4% to 6% growth rate this year. "The scope of the economic fallout was evident even among out longer term superprime cardmembers," said Chairman and CEO Kenneth Chenault.
Even that's not a surprise, as many debt holders can barely keep their heads above water.
Americans were carrying $960 billion of credit-card debt in May, up from $879 billion at the end of 2006. The average household with credit cards has a balance of $8,600, according to the Philadelphia Inquirer.
It only helps to confirm what we've said all along.
Here's what we reported in Wealth Daily on July 5.
American Express (AXP) continues to be a favored short. And that's because they hold consumer debt, and fall prey to mounting delinquencies. So when I learned that UBS upgraded the stock from Sell to Neutral, I had to laugh at the absurdity.
The argument remains the same, though.
If you want to own a credit card stock, buy Visa (V) or MasterCard (MA). They do not hold consumer debt. They simply process the cards.
American Express on the other hand deals directly with credit. It has to worry that as of November 2007, credit card debt "soared at an 11.3 percent annual rate in November following an 8.5 percent rate of increase in October" and is still on the rise."
They're the ones where share values are being beaten stilly because of charge-offs, payment delays, and higher delinquencies.
Same goes for American Express, whose CEO said, "Business conditions continue to weaken in the U.S. and so far this month [June 2008] we have seen credit indicators deteriorate beyond our expectations."
It was January when AXP's CFO Daniel Henry predicted that the company's U.S. write off rate would peak between 5.1% and 5.3% in 2008. It's now July and delinquencies and default rates are growing worse.
American Express and Cash-Strapped America
With homeowners struggling to stay above water, American Express has to worry about further delinquency problems, as credit card debt balloons.
Instead of just using credit cards for big ticket items (TVs, furniture), some are now charging gas, food, and even paying other bills with them. And some are only making minimum payments... if they can afford even that.
It's far more difficult these days for many consumers to dig their way out of debt, since other relied upon options, such as home equity lines of credit, are no longer readily available.
National revolving debt just hit a record $957 billion in April, from $800 billion four years ago. Total credit card debt was up by 0.4% in April, according to the Fed. And Moody's is reporting that the charge-off rate, which measures credit accounts considered uncollectible, hit 6.27% in April.
Q1 consumer borrowing skyrocketed to $34 billion, the biggest amount since 2001 when the U.S. was diving into a recession. And not all of that may be paid back. Credit card investors are becoming increasingly concerned that a weaker U.S. economy will hurt borrowers' ability to pay back debt.
But as long as there are naïve investors, and foolish upgrading banks, it's hard to get that reality to the investing masses. Still, downside risks remain at American Express... even Discover and Capital One. They'll slide long-term as subprime fiascos are replaced with Option ARM reset fiascos.
Good Investing,
Ian L. Cooper
http://www.wealthdaily.com
