Wednesday, July 16, 2008

Question: American Express Monthly Payment Rate?

I was just trying to apply the "Wilbur Ross chart method" on American Express (I'll work on the name)

CNBC: I read that you have a chart system? How does that work?
WILBUR ROSS: We use charts, not stock trading charts but business charts, and the way they work is, when we're looking at an industry we try to put down in paper everything we can imagine that's wrong with the industry. Usually it's quite a long list. We then go over it, and over it, and over it, and over it till we're pretty well satisfied that we've identified everything that is wrong or is very likely to go wrong. Then we start work on a second chart, which is if we have control of this industry, what would we do to fix these problems. When the two charts get more or less similar in length, that's when we get serious about investing.

So, when looking at American Express, you have a business with several positive trends working in its favor:
1) Long term increased spending
2) Long term increased use of cards over cash
3) International growth potential
4) Increased retailer acceptance potential.

Now the main concern with American Express is their exposure to bad credit debt in this down-cycle. So:

Problem ...................... | Solution
-exposure to bad debt | -tighten standards, raise rates

(excuse the quick chart)
Remember, AmEx is not the typical card company. Most cards are issued by banks who make their money off of late charges and interest costs. AmEx earns a vast majority of its revenues from merchant fees. In fact, it has actually been losing money on its lending operations for some time.

Which led me to my next question: how fast can they reduce lending and change standards? To figure that out, I'm trying to find out the average loan length. I found this:

The first one is for consumer lending, while the second is for charges that go late. Am I reading it right then that consumer loans have an average life of about 5 months, and consumer charges are a little over 1 month? If so, it seems like guidelines can be tightened fairly quickly and without too much damage.

Disclosure: I own shares of American Express.


Al said...

AMEX seems willing to lose money on their lending programs in order to increase their exposure to big spenders. In a recent presentation, management noted that much of the recent growth in the lending portfolio had been concentrated in housing bubble locations, largely due to the correlation with high-spending mid and small businesses.

My impression is that AMEX views the lending side as a cost of attracting customers, much like an extended rewards program, or the way a small bank lowers its credit standards for big depositors. In the short-term, however, the VISA and Mastercard settlements should provide a nice cushion for losses.

Nnejad said...

That seems to be the case, since lending seems to have almost always lost them money. I guess the question then is have lending standards been allowed to run amok recently?

Anonymous said...


I will refrain to opine beyond the obvious (AXP is a core Buffett Holding -so thumbs up), but what I really liked is the RARE and detailed example of what it really takes to have a circle of competence in anything.

The first part of this post shows the kind of business analyst work that is required to be right in investing.

Nnejad said...

Thank you! I'll share with you an "ah-hah" moment I had last night when I ran into the following quote, from The Art of War by Sun Tzu.

“Hold positions that can not be attacked, attack places that can not be defended.”

Well I read over that and thought of AmEx, but maybe even better would be Coke. Either way, find a company like that and you have something powerful.

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