Analysts at JPMorgan Chase & Co. resumed coverage of American Express Co. on Wednesday, rating its stock "underweight" and predicting that the issuer's profits would take a long time to rebound.
In a note to clients, analysts led by Andrew Wessel predicted a 45% year-over-year increase in loan-loss reserves this year; the pace of Amex's chargeoff rates will remain high and weakened discretionary spending will drive down spending volumes on its cards, the note said. Assuming that "unemployment crests at 10%" by the end of this year and that billed business falls 5.9% this year, Amex's managed chargeoffs should peak at 11% in the second quarter of 2010, Wessel wrote.
Amex will remain "profitable through the cycle, but a prolonged recession will restrict material earnings growth until 2011, leading us to predict shares will lag broader financials in a recovery," Wessel wrote.
He has a $10.50 price target for the stock and predicted earnings per share of 50 cents this year and $1 next year.
Wessel wrote that Amex was "one of the best capitalized companies in the credit card business" at the end of last year and "has a substantial liquidity cushion to help it weather further economic deterioration this year and next."
Amex is continuing to explore ways to raise capital. On Wednesday it said it is considering selling its stake in Industrial and Commercial Bank of China. Reports had surfaced in January that Amex could gain about $500 million on a sale of its whole stake in ICBC but could not begin to do so until April, when a restriction on selling up to half the shares expires.
Amex confirmed Wednesday that the lock-up for its shares "will expire in two equal installments on April 28, 2009 and October 20, 2009." In a joint announcement with ICBC, Amex said that "depending on market conditions, the company may sell its ICBC shareholding at some point after the lock-up period, and will explore all potential methods of sale that would maximize value and minimize market impact, with a preference for a private sale to investors."
Amex said in its annual report that the estimated fair value of its stake last year was $544 million.
The company said selling the stake would not affect its "strategic cooperation" with ICBC, which has issued more than 600,000 Amex-branded cards in China since 2004. Kenneth I. Chenault, Amex's chief executive and chairman, called ICBC "one of our most important card issuing partners" in the release and said, "We look forward to expanding our partnership in the years to come, by delivering new and innovative payment products to ICBC's customers, and continuing to serve them as they travel around the world."
