On Monday, it was reported that Stifel Nicolaus upgraded American Express (NYSE:AXP) to "hold" from that much dreaded "sell" rating. In this environment, I'd consider that good news, but does this mean that now is the time to charge back into the stock? I'm not so sure.
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The Good and the Bad
The upgrade was good news, especially because there hasn't been many promising news reports for the credit card industry. In addition, I think AmEx has the longer-term potential to generate some serious earnings as this country grows and spends.
Overpriced?
However, there are a few things that concern me. AmEx currently trades at about 24 times the current year estimate, which is 90 cents, which I just think is too overpriced. It also seems rather high given that the company is expected to grow at only a 10% rate per annum in the next five years Just for reference, Mastercard (NYSE:MA) trades at roughly 15.5 times this year's estimate and it's expected to grow at a more than 17% rate per annum in the next five years. Meanwhile, Visa (NYSE:V) trades at about 21.5 times this year's estimate and is expected to grow 20% per annum in the next five years. Finally, Discover Financial Services (NYSE:DFS), which made headlines earlier in the week because of its plans to sell stock, is actually expected to lose money in 2009 and make a slight profit 2010. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
The Future of AmEx
Also, AXP has really had a pretty fabulous ride over the passed several months, which was great for existing shareholders. However, I sense that the larger market could retrace some of these gains, meaning I'm reluctant to chase the shares because I think they may have gotten a bit ahead of themselves.
American Express is expected to have its Q2 conference call on the July 23, and I'm unsure as to whether the company will be able to come in better than the 22 cents analysts are expecting. The company's recent track record has been sort of mixed. In fact, a look back at the data reveals that it missed expectations in two of the prior four quarters. I'd like to see it meet or beat expectations for another couple of quarters before I start to get charged up.
With all that in mind I do want to point out that AmEx's dividend is attractive to me. At present, the forward yield is a little more than 3%, which does provide some solace.
Bottom Line
American Express is a company with a bright future. But right now I'm not all that excited about the stock, and I'm especially not thrilled with the fact that it trades at a high multiple of expected earnings. My hunch is that the shares could dip in the near run. (Learn more about ratio analysis in our article, Analyze Investments Quickly With Ratios.)
