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Stock Analyst Update

Fears of Slowdown at American Express Could Signal Buying Opportunity

Lower growth projections aren't as bad as they might seem.

What Happened?
American Express (AXP) said Monday afternoon that it expects a slowing economy in 2001 to cause the firm to hit only the low ends of its financial targets: 12%-15% earnings-per-share growth, at least 8% revenue growth, and a return on equity of 18%-20%. The news came as part of the company's fourth-quarter 2000 earnings release. In the release, Amex said that its diluted quarterly earnings per share grew 14% from the same period a year earlier to $0.50, equaling the Zacks consensus forecast.

What It Means for Investors
Shareholders shouldn’t hit the panic button. Though fears of slowing growth sent Amex's stock price marching downward in late-day and after-hours trading, we believe the stock could end up looking like a buying opportunity. If any business weakness does actually materialize in 2001, we would expect it to be concentrated in the Financial Advisors unit, which manages assets and offers financial planning and other services. The unit, which accounts for about a fourth of revenue, delivered only 2% net income growth and 7% revenue growth in the fourth quarter. However, the business is inherently cyclical because it earns fewer management fees on investors' assets when stock markets--and thus customers' assets--fall in value. Long term, the business should continue to provide some of Amex's best growth opportunities, and the firm might actually take advantage of its size to acquire rivals at discount prices during a lingering downturn.

Separately, Amex's Travel Related Services unit, which includes the firm's big credit card business, continues to chug along, with net income growing 16% in the fourth quarter from the same period a year earlier. While some other credit card firms are eating into earnings by bumping up loan-loss reserves to cover potential bad debt, Amex's blue-chip portfolio actually had a decline in the percentage of bad-debt charge-offs in the fourth quarter (both sequentially and on a year-over-year basis). Further, we believe Amex is likely to continue stealing market share in 2001 from Visa and MasterCard issuers, as it did in 2000. Some of that growth could come internally as the company realizes the full potential of its Blue card, which is targeted at younger borrowers who fit Amex's customer profile by showing above-average incomes and credit ratings. Additional growth is likely as Amex continues its strategy of acquiring banks' card portfolios, as well.

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Craig Woker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.