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

The Stock Market is Yesterday's Leftovers with Mr. Softee the Latest Case in Point

Stock prices will indeed fluctuate, because that is how the financial community makes money.

Behind the worn facade of beating the Street by a penny or two, reality does exist in the form of historical quarterly reports by corporations.  Today, Microsoft fessed up to its maturity.  It has rapidly gone grey.

The December quarter for Mr. Softee represented a negative surprise, with earnings of $0.47.  The Value Line MSFT report of 2/20/09 indicated March quarterly sales of $14.00 B and earnings of $0.40/share.  Today we learned that sales were only $13.6 B, earnings excluding writedowns on assets (this is not limited to financial companies!) were $0.37, and guidance was withdrawn.  Operating margins were about 34% and have been eroding for 10 years, when they were 56%.  The company has about $17 B of net working capital and little other tangible book value.

Operating expenses are being cut.  Microsoft is not in "runoff" mode, but it is trading post-earnings release at 10X tangible book value and almost 3X sales.  It has lost almost all creativity; it has made no impact on the Internet.  Yours truly has no idea what the discounted present value of its future cash flows will be, and neither does any analyst.  

Consider however that earnings in the March quarter were $0.50, 0.47 and now about 0.37 per share in 2007-9.  

MSFT exemplifies much of what is wrong with American business.  It is too big to grow much more and in fact is shrinking for real ($60 B in sales); it is too strong and important to fail; its management is rich and entrenched; it is discounting its wares:  there is no pizzazz.  Yes, the stock was halved in a year and a half and may be ready to rebound, but the thrill is definitely gone.  

AmEx also reported this afternoon, projected ugly consumer default rates, missed earnings estimates that Value Line also published 2/20/09 (when it traded at $16/share).  In keeping with the times, naturally it traded up sharply after hours.  Earnings for AXP this quarter were about 1/3 less than in the same quarter 4 years ago.  Absent government action and conversion to bank holding company status, who knows what this company would be like by now?

Perhaps stock traders are relieved that these behemoths aren't going bankrupt!  

Seriously- when giant companies such as MSFT and AXP ruthlessly cut costs (meaning fire people) and show extreme cyclicality, yet trade well above book value and have uncompelling dividend yields, they are not on the true bargain counter.  And these are high quality, beaten down stocks.

The "laws" of cyclicality suggest that at some point there will be true bargains in some financial asset class, as stocks were in the late 1940s and early 1950s and bonds were in the 1980s.  It's hard to find any such assets now.  Patience continues to make sense.

Copyright (C) Long Lake LLC 2009 

Wednesday Evening Market Update: AmEx and Hoover

AmEx filed its 8-K with the SEC today.  Stabilization in 30-day past-due loans are said to have sparked a new rally in the financials, with Capital One, which led a sell-off in the morning with poor fundamental data, ending in the plus side.  

Econblog Review has in fact reviewed the AmEx 8-K and is unimpressed.  For one, total loans are plummeting, from $59.5 B on Jan. 31 to $56.5 on Mar 31.  That's a 5% drop in 1/6 of a year.  Put that in a calculator and annualize that.  Obviously AmEx is dropping its least creditworthy borrowers, so charge-offs will improve.

In addition to owned and managed loans discussed above, AmEx is involved with an off-balance sheet securitized "Lending Trust", data from which were also revealed today in the 8-K.  Not so hot:

Even as assets plummeted from $38.6 B on Jan. 25 to $36.0 B on Mar. 26, the annualized default rate soared from 8.3% to 9.7%.

As a stock, AmEx now trades at almost 3X tangible book value at at almost 40X current 2009 earning estimates and almost 20X current 2010 earning estimates.  The stock price has doubled in 6 weeks, bringing it all the way back to a level that, 2008 excepted, it had not traded at since 1997.

If AmEx were a stock in the second half of the 1990s showing exploding earnings and a major bull move that then halved with no real change in the fundamentals and still traded above its 200 and 150 day simple moving averages, you would have said this stock is a strong buy.  And until the year 2000, you would have been right.  The opposite likely applies now, even though unlike the 1990s, there are not many "inverse" cheerleaders telling the public to sell it short.

In a different vein, the following information was provided by Casey Research today, along with a chart demonstrating new lows in steel pricing in China:

Last year, while the economic crisis gathered steam Chinese steel prices plummeted and companies responded by running down inventories. Even with the infrastructure stimuli announced by the Chinese government, the recent surge in iron ore imports was a miscalculation by the Chinese steel industry. As you can see in the chart above, re-stocking has sent domestic steel prices back to the levels below the initial crash, and they’re still headed south, indicating that further contraction of the Chinese economy is baked in the cake.

This goes along with other commentary here that China has signs of being a Potemkin economy.

Back in the U. S. as well as involving its international operations, Burger King announced an unexpected drop-off in business in March.  McDonald's sold off in sympathy; MCD's earnings estimates have started to be cut.  MCD and WMT, last year's only 2 Dow Industrial winners, are both down sharply from their highs, are below their levels of 12 months ago, and have underperformed the Dow in 2009.  In other words, there is almost no real leadership.  The single strongest charts are of Ginnie Mae funds and deeper discounters than Wal-Mart.  The rest of the stuff is at best mostly churning.

On the one hand, this is a market for guessers.  On the other hand, what we know is that there is little real loan demand outside of refis, almost all of which demand is artificially created by the Feds; charge-offs are increasing; asset values of CDOs are not increasing; therefore the financial business is not getting better except for pure gifts in various ways by the Fed and the Feds to these companies.  Herbert Hoover's strategy of shoring up the banks did not work in the early 1930's following the bursting of a debt bubble.  Why should a similar but worse strategy work now?

Copyright (C) Long Lake LLC 2009