American Express

by Dale Wettlaufer (DaleW@fool.com)


Alexandria, VA (July 27, 1998) --American Express Co. (NYSE: AXP) gained $5 3/4 to $112 13/16 today after reporting Q2 earnings per share of $1.24, up 15% year-over-year on a 7.7% increase in quarterly revenues. Sequential comparisons don't seem to mean much for the company, as the April-June quarter looks like a seasonally stronger quarter than the January-March quarter. But just to make things clear, the company reported net EPS of $0.98 last quarter, which included a large bulking up of reserves for troubled Southeast Asian loans as well as extraordinary credits to net income.

At the time, I wrote that I believed the extraordinary credits should be wiped out of net income, since they were non-recurring in nature. Non-recurring credit losses are the norm in the financial services business. If a company's credits go bad or if it has sufficient reason to believe that credits will go bad and its credit loss reserves are not sufficiently large to cover the losses comfortably, it will have to take a one-time charge to earnings to reflect the net credit losses it foresees. That doesn't mean that an investor should put those expenses in the same league as a one-time charge for a merger, for instance.

If you make a loan to an Indonesian company that then used cash to finance working capital, the loan has to be written off if that company is now insolvent and if there's no hope of recovering the asset. The nature of lending is that it's a lumpy business. I'm sure there aren't that many companies that tell their investors to truncate the last 30 basis points in a quarter in which it achieves return on assets (ROA) of 1.7% just because conditions are better than expected. Only under those sorts of circumstances is a company on firm enough ground to wave away loan losses as "one-time" events.

In any case, the company's ROA performance this quarter looked to be solid, around 1.8% to 1.9%, annualized (the company doesn't include a complete balance sheet with its earnings release, so I have to extrapolate a bit here). ROA in a seasonally stronger quarter should be good, though, and I don't have enough experience with this specific company to say whether that's where things should be or not.

Strategically, the company executed in a number of areas this quarter. The company's discussion of its business lines can be found on its website. Either click here or go to: http://www.americanexpress.com/corp/corpinfo/invinfo.shtml. Meanwhile, the full financial release is available at: http://www.americanexpress.com/corp/corpinfo/2Q98.shtml.

Although American Express hasn't been named to our list of possible companies in which to invest, mainly because the Cash-King Portfolio owns the stock, that really shouldn't stop us from considering it -- so we will consider it, too. I would recommend that Drip readers take a look, using some of the analytical methods they've picked up over the last couple months. The company has many of the attributes of the sort of financial services company we like.

Have a good Monday night.

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7/27 Close

Stock Close Change CPB $54 5/8 + 3/4 INTC $86 1/16 +3 JNJ $77 + 7/16
Day Month Year History Drip 1.98% 8.73% 13.40% (3.42%) S&P 500 0.57% 1.18% 18.22% 20.60% Nasdaq 0.11% 2.03% 23.11% 21.30% Last Rec'd Total # Security In At Current 06/30/98 3.017 CPB $54.259 $54.625 07/01/98 9.724 INTC $80.239 $86.063 07/07/98 6.010 JNJ $69.708 $77.000 Last Rec'd Total # Security In At Value Change 06/30/98 3.017 CPB $163.70 $164.80 $1.10 07/01/98 9.724 INTC $780.21 $836.83 $56.62 07/07/98 6.010 JNJ $418.95 $462.77 $43.83 Base: $1700.00 Cash: $286.05** Total: $1750.46

The Drip Portfolio has been divided into 72.501 shares with an average purchase price of $23.448 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
7/21/98: Sent $60 to buy more CPB, and $40 to buy more JNJ.