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Dear Mr. Berko: I was sent a Value Line research report on American Express that expects this company to trade as high as $70 a share in the next three years. That鈥檚 a $45 increase in value. Then I read a Yahoo profile for American Express that says it will earn $1.80 next year. That鈥檚 more than enough to cover the dividend, which pays 3 percent and is much better than anything I can get from a CD. Is this still a top-quality growth company? If you agree that it can recover from this economic disaster, I鈥檇 like to buy 40 shares for my Roth IRA. Please give me your opinion on the company and let me know if it would be a good investment.

P.E.
Lady Lake, Fla.

Dear P.E.: I wish I had been smart enough to buy American Express (AXP-$31.86) last March when this once-hot 鈥減lastic鈥� company melted down to 10 bucks a share.

American Express, born in 1858, has a presence in 131 countries and is best known for its ubiquitous but upscale credit cards that many folks won鈥檛 leave home without. I used to be inordinately impressed with American Express because this company had the authority and ability to print its own money … as much as it wanted. American Express was synonymous with celebrity status, corporate perks, Mercedes cars, Ritz-Carlton, Vacheron Constantin, princes and Tiffany.

Today, American Express has lost its vaunted cache. It has been humbled by its excessive hubris, the willy-nilly issuance of its once-selective credit card and its careless failure as a credit underwriter. I say 鈥渃areless鈥� because American Express鈥� starry management decided to compete for the same barrel of applicants as Discover, MasterCard, Visa and JPMorgan Chase. So they did. And a few years later, the shares imploded from $65 in 2007 to $10 in March 2009, net-profit margins collapsed from 14.5 percent to 4.5 percent, and return on capital fell from 8.8 percent to 4.4 percent. And as a result of ensuing losses, American Express will soon have to raise $600 million in common stock to prove it can tap the equity markets for funding.

I still believe that American Express is a classy company; however, this industry is facing a significant decline in consumer spending as many Americans try to pay down their substantial debt loads. Meanwhile, rising unemployment is causing many cardholders to ignore their debts so that rising loan losses are likely to persist for at least another 18 to 24 months. And this doesn鈥檛 bode well for balance sheet and revenue growth. American Express has about 92 million credit cards outstanding, while Visa, MasterCard and JPMorgan Chase collectively have issued about 400 million credit cards. The credit card industry is oversaturated. And frankly, it wasn鈥檛 long ago that there were at least four or five credit card offers in your mailbox every week. Well, that鈥檚 stopped as abruptly as a rabbit鈥檚 tail, so the competition is fierce. That will erode profit margins, making it more costly to attract and keep customers.

Plus, consumers are overloaded with debt; some estimates say that revolving credit exceeds the annual income of the average consumer, who just can鈥檛 carry another dollar of debt. And a rise in delinquencies, which is anticipated, could hurt American Express鈥� balance sheet and further lower earnings.

Meanwhile, some observers are concerned by the proposed changes in bankruptcy laws that would permit judges to rewrite mortgage terms. They see this as a prelude to a surge in bankruptcies that would eventually lead to larger loan losses for the entire credit card industry, including American Express.

Now I don鈥檛 know where Yahoo came up with estimated 2009 earnings of $1.80, and I鈥檓 willing to wager 10 pounds of $5 gold pieces to 10 pounds of $20 gold pieces that the $1.80 number is wrong. I鈥檓 hearing 2009 earnings of $1.30 to $1.38, and I trust that number.

Value Line鈥檚 analysts may be smoking some of those funny cigarettes if he believes American Express could reach $70 in the coming few years. The stock has never surpassed $66 in the last 20 years. So, why should it reach $70 by 2012? At best, I think American Express could gravitate to the low $40s in the coming three years. Its business just doesn鈥檛 generate the same excitement as in the past.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or e-mail him at [email protected].
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