Credit metrics are still continuing to show modest improvements across the land, yet recent government action via a Department of Justice antitrust suit has put the hit on shares of American Express (NYSE: AXP) after MasterCard Inc. (NYSE: MA) and Visa Inc. (NYSE: V) have both reportedly settled on their cases yesterday. Monday was rough on word of a federal antitrust lawsuit and Tuesday has American Express opened at $39.30. So far today, the stock has AmEx as the ONLY stock of the 30 DJIA components trading in the red.
After taking a look at American Express performance in the past and comparing the forward earnings estimates (even with a discounting) against MasterCard Inc. (NYSE: MA) and Visa Inc. (NYSE: V), it really looks as though this sell-off is a gift in a market-neutral scenario.
FBR Capital maintained a ‘market perform’ rating but lowered AmEx’s price target down to $45.00 from $48.00 after the company’s decision to fight the government may put shares in a short range for some time.
Fitch has issued a note calling AmEx’s decision as being one that now could keep AmEx in the spotlight and that this could take a long time to resolve.
Morgan Stanley believes that the sell-off has been overdone and it maintained an overweight rating with a $52 target.
What needs to be kept in mind that is that the DOJ antitrust suit is NOT about a monopoly nor is it calling for a break-up. This is about making AmEx lower its average US merchant discount rate.
Shares are down another 2.6% on Tuesday at $38.01 and this follows a drop on Monday to $39.05 from a close of $41.78 on Friday. AmEx shares were just shy of $44.00 in the last week. In short, this is about 13% all in all at a time where stocks are still trying to hold their own. The 52-week trading range is $32.64 to $49.19.
Even if we trim estimates by 5% from Thomson Reuters earnings estimates to account for a more geared down model ahead, we would be at $3.15 EPS for 2010 and $3.42 for 2011. That gives a blended forward earnings multiple for AMEX of 11.6-times forward blended earnings expectations. If this has no real impact on AmEx earnings and the company manages to meet current estimates, then a blended 2010-2011 forward earnings multiple is right around 11 today.
This does not put shares dirt cheap when compared to the traditional banks, but blended estimates for MasterCard and Visa would be close to 15-times a blended forward 2010-2011 earnings estimate for MasterCard and about 17.3-times a blended forward 2010-2011 earnings estimate for Visa.
As far as how $38.00 today compares to the recent months, AmEx dipped under $38 in May and traded under $39 at the peak of selling in late June and right before the July 4 holiday. Just because stocks get relatively cheap to peers or just because they get oversold, that alone won’t drive shares higher. Still, that is when longer-term investors with a horizon beyond hours or days start to accumulate shares.
JON C. OGG