American Express (AXP) has adequate cash to weather this credit crisis…

November 18, 2008

…and a well-known and well-respected brand to boot. But the globe’s leading financial company is struggling to deal with the mounting debt of its customers.

Credit card customers are carrying more debt than ever, and an increasing share of that is being shouldered by the industry itself. A rise in delinquencies could affect a credit card issuer’s capacity to loan money, and this is especially true for American Express.

Up until recently, AmEx has relied solely upon capital markets for financing. Over the past couple of months, I’ve talked to you at length about problems in the commercial paper market, so you can understand why American Express had to diversify its sources of financing. Earlier this month the company transformed into a bank holding company, meaning AmEx would be eligible for a $3.6 billion slice of the Treasury Department’s bailout plan for banks.

This move might allow AmEx to strengthen its position by lending more freely and building a larger deposit base to broaden funding, but it speaks to how the nation’s biggest independent credit card company is reeling in the market turmoil.

In the third quarter, AmEx reported a 24% drop in profit. As a result, the firm announced it would cut 7,000 jobs—or 10% of its workforce—to save up to $1.8 billion in 2009 to compensate for further loan defaults.  

Now, this isn’t to say American Express will go belly up. The stock has a fantastic return on equity and even the firm’s harshest critics expect AmEx to turn a profit in 2009—just not with the ease it once could.

Remember, earnings are the backbone of my investing strategy. If a company can’t successfully grow its sales and earnings in any kind of market, PortfolioGrader will rate it appropriately and if the stock doesn’t make the grade, it won’t appear on any of my Buy Lists. It’s as simple as that.

Right now, PortfolioGrader gives AmEx a D grade. While there’s no doubt in my mind that the company’s solid business model will lead it to a full turnaround, AmEx’s profitability through at least the first half of 2009 will be compromised. Consider this stock off limits! Until this company has had adequate time to adjust to the economic slowdown, it won’t be able to offer its shareholders the value they’ve come to expect from this leading financial institution.

Do you think credit companies are teetering on the brink of collapse? What’s your take on American Express? Send me your comments!