American Express Co. shares may be ready to advance, says Sanford C. Bernstein & Co.
The optimistic view on the stock comes 15 months after the company took a $265 million hit to earnings because of problems in its fledgling Optima credit card program.
"Just as they have had a severe problem with Optima, they should have significant credit quality improvement, and that helps earnings," said Bernstein analyst Guy Moszkowski.
Bernstein recently issued a bullish report on credit and charge card business, predicting card-transaction volume could increase 10% annually as cards become more widely accepted by merchants and consumers.
Investors face a choice between banks such as First USA Inc. and MBNA Corp. that are positioned for growth in the card market and the "turnaround" opportunity at American Express, the report said.
American Express shares had traded as low as $18 because of problems at the Optima operation, a loss of market share to the bank card issuers, and a series of poorly timed acquisitions.
More recently the share price jumped $1.375, to $24.75, as investors welcomed the news on Dec. 7 that American Express' embattled chief executive, James D. Robinson 3d, was resigning.
But generally the "the stock has been rather frustrating," said James Hanbury of Wertheim Schroder, a New York investment bank.
The stock was trading at $24.625, off 12.5 cents on Tuesday.
25% Increase in Value
Mr. Moszkowski said the price could advance 25% once the benefits of credit quality improvements and cost cutting begin to flow to the bottom line.
"The market still responds to earnings," he said, adding that so far any improvements in the loss and delinquency rates have been used to build reserves.
He is projecting earnings of $2.35 a share in-1993, up from $1.59 in 1991, and a projected $2 this year.
Mr. Moszkowski said credit quality would improve naturally as the Optima portfolio matures and bad credit risks are flushed out of the system. Like most lenders, American Express will benefit from an improved economy, he said.
If the company meets its goal of cutting expenses by $1 billion annually, it could be earning $3.40 a share in 1996, he said. He was skeptical, however, that all of the planned savings can be achieved.
The company's charge card business, which profits from fees rather than finance charges, also is poised for a rebound, Mr. Moszkowski argued.
For one thing the fee paid by merchants for MasterCard and Visa transactions could start to rise from about 2%. That would offset one of the advantages bank card companies have over American Express, which charges 3%.
The American Express charge card could look more attractive to consumers, too, if banks begin to shorten grace periods, Mr. Moszkowski said. Until now, he said, banks had been willing to subsidize customers who did not take on debt by charging high rates to those who did. But pressure has been building to control rates.
Skeptics See Another Side
Other analysts remained unconvinced.
Card use for travel and entertainment, American Express turf, hasn't bounced back as well as retail sales. Thus, American Express could continue to lose market share, they said.
Although there could be some movement on fees and grace periods, "I would not hold my breath for the banks to make American Express healthy," added Mr. Hanbury.