During the October 8 episode of Mad Money, a caller challenged American Express Company’s (NYSE:AXP) recent performance and management’s growth promises. Jim Cramer acknowledged the stock’s weakness and that evening’s regulatory news, as he said:
Well, I know there was some difficult news tonight about American Express that I think did contribute to some after-hours trading… They were fined for $350 million for lapses in a money laundering situation. But let me just say this. I want to make this point. First of all, you’re absolutely right. It’s down 16%. So you could say, “If I listen to Jim, I’m down 16% in American Express.” Or you could say, “Jim’s liked this story as long as Warren Buffett liked it, which is kind of forever.”
I think that it’s a premium card. I like the situation. Younger people are getting it. It is not necessarily the right time, as you said yourself. I know that if you bought American Express when I said to buy it, you would have gotten it much lower, but you might have gotten it higher, too. So here’s my case: It is underperforming right now, but we must make allowances for great brands and CEOs that underperform, or else we’re never going to be in great stocks. There are moments of underperformance for all of the best stocks, and this is one of them for American Express.
American Express also appears among the stock picks in Mario Gabelli’s fund.
Card Spending Continues to Grow
American Express Company reported second-quarter revenue, net of interest expense, of $19.64 billion, up 10% year over year. Billed business increased 9% to $455.8 billion, while diluted EPS rose 11% to $4.53. Management raised its full-year revenue-growth outlook to 10% and maintained EPS guidance of $17.30 to $17.90.
The company also said its Platinum portfolio was its fastest-growing U.S. consumer business and highlighted continued customer acquisition among Millennials and Gen Z. That supports Cramer’s comment that the brand remains relevant to younger customers. The customer growth also featured in Cramer’s September case for adding to American Express during selloffs. That discussion examined a feature of its revenue model that sets it apart from conventional card lenders.
Regulatory Failures Add to the Burden
The $350 million penalty Cramer referenced is confirmed. On October 8, the Office of the Comptroller of the Currency imposed the penalty on American Express National Bank and issued a cease-and-desist order over deficiencies in its anti-money-laundering compliance program. The regulator identified failures in risk assessments, customer due diligence and suspicious-activity monitoring. The OCC said the bank failed to identify, evaluate and sufficiently report approximately $13 billion of suspected trade-based money-laundering activity in a timely manner over the preceding decade. That describes suspected activity and reporting failures, not a finding that American Express itself laundered that amount. The Federal Reserve issued a concurrent cease-and-desist order against the parent company and its travel-services subsidiary.
Separately, second-quarter expenses increased 12% to $14.5 billion, faster than revenue. Higher customer-engagement costs, Platinum benefits and operating expenses contributed to the increase. The net write-off rate remained stable at 2%, although lower credit provisions partly reflected a reserve release.
American Express Company also retains a valuation premium. The stock trades at 16.5x forward earnings, versus 9.1x for Capital One and 7.7x for Synchrony Financial. Those lenders have different customer and revenue mixes, so the gap is not a direct measure of overvaluation. It does show that investors continue to pay more for American Express despite its recent difficulties. Cramer has not always considered that price an invitation to buy. In September, he explained why liking American Express was not enough to recommend an immediate purchase, raising a concern that extended beyond the company’s latest results.
Hedge Funds Added Modestly
There were 85 hedge funds with American Express positions in Insider Monkey’s Q2 database, up from 83 in the preceding quarter. Berkshire Hathaway remained the largest shareholder in Q2 with 151.6 million shares. Short interest was 2.06% of the float. Participation increased slightly, while short positioning remained relatively limited.
Cramer’s patience rests on the strength of the franchise, and spending growth gives him a reason to remain interested. But a strong brand does not excuse compliance failures or make rising costs disappear. American Express Company now has to preserve that customer momentum while putting its regulatory problems behind it.
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