Thursday, July 23, 2009

AmEx Misleads Investors about Ongoing Earnings in Its Press Release

American Express Company (Amex, AXP) stated that earnings from continuing operations in Q2 ending last month were $342 after taxes. Buried deep in the press release, however, is the following, the last section of Amex's "divisions":

Corporate and Other reported a second-quarter net income of $171 million, compared with net loss of $2 million a year ago. The second quarter 2009 results reflected the recognition of $220 million ($136 million after-tax) for the previously announced MasterCard and Visa settlements compared to $70 million ($43 million after-tax) in the year-ago period related to Visa. Results also included the ICBC gain discussed previously, partially offset by reengineering charges incurred during the quarter.

Anybody who thinks that the MasterCard and Visa settlement represents core ongoing earnings is incorrect. Ignoring small adjustments, truer basic earnings were $206 M. There are 1.2 billion shares outstanding. Thus, truer ongoing earnings were about 17 cents per share. The dividend is 18 cents per share.

Book value is $11.28/share.

AmEx is borderline earning its dividend. It has $13.4 billion in book value but loans and credit balances of $65 billion. Thus, a 20% error in overvaluing how good its loans and credit advances are would completely wipe out its book value.

Furthermore, never has the Federal Reserve done so much for so few finance companies. What will happen to these companies when, inevitably, "money" grows tight again?

AXP as a stock has tripled since it bottomed under $10/share this winter. Yours truly sold his AXP puts ($10 strike) at a profit right at the bottom and now sees an overvalued stock selling at 40% above its downsloping 200 day moving average. Can the ever-present "they" keep this stock up with such weak results and so much profit embedded in this stock?

Anyone who likes Amex as an ongoing business and wants to buy into it may think that a share price under $20 represents a much fairer deal that the current price in the high twenties.

Copyright (C) Long Lake LLC 2009

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