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Strategies & Market Trends : Value Investing
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To: Jurgis Bekepuris who wrote (29664)1/11/2008 10:18:38 AM
From: Spekulatius  Read Replies (2) of 78465
 
AXP - I do not think that the growing debt is the problem - this is part of AXP growing business. the transactions business requires float and the lending business is debt. More business means a larger balance sheet. However what i take offense in is that AXP has whittled down the reserves during the good times (in terms of % of receivables) and thus shown higher earnings growth than they would have otherwise. Also their tangible equity looks somewhat low, a result of stock buybacks.

Now comes the double whammy - the credit losses are going to increase and the reserves for same need to be boosted. So for roughly 50B$ in outstanding loan an increase of 1% in credit losses will translate into 500M$ reserve increase and 500M$ in additional credit losses or a 1B$ earnings impact. 1% increase in losses is a very possible number, so i can almost guarantee that this 400M$ writeoff will not be the last.

That being said, AXP is a great franchise but i think we are seeing a 3 as a first number for the stock price first.
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