American Express (NYSE:AXP) will step up to release its first-quarter earnings report after the close of trading this afternoon, and watchers on Wall Street have more than a few reservations ahead of the announcement.
AmEx is expected to post a profit of $1.12 per share on revenue of $8.04 billion — if so, both figures would be a nice improvement over EPS of $1.07 on sales of $7.6 billion in the year-ago period.
While many analysts expect strong growth — mainly due to AmEx’s more affluent consumer base — slowing economic growth and declining retail sales have some worried. Additionally, the first quarter of the year is typically slow for retailers, as consumers focus on paying down debt instead of making new purchases.
Given the cyclical nature of American Express’s credit card business, investors likely have already priced in any seasonal weakness. This places the company’s travel business, which is currently undergoing restructuring, front and center.
In the Q4 2012, American Express took a $400 million restructuring charge related to its travel business. Furthermore, the company announced in January that it would be eliminating 5,400 jobs, mostly in the travel business, as it moves toward a more robust online experience. Additional restructuring charges in the first quarter are certainly not out of the question.
As noted above, many on Wall Street are in a holding pattern when it comes to American Express. For instance, data from Thomson/First Call reveals that analysts have doled out 12 “buy” ratings, compared to 12 “holds” and three “sells.” What’s more, the average 12-month price target for AXP rests at $67, representing a measly premium of only 3.7% to Tuesday’s close at $64.59. The takeaway here: There’s plenty of room for potential upgrades if American Express can erase some of Wall Street’s doubts.
Doubt also has grown among short sellers, with the number of AXP shares sold short more than doubling to roughly 14 million since the beginning of the year. That said, AXP’s continued rally is giving some of these bears pause, with short interest declining by about 8.4% during the most recent reporting period. Additional short covering could provide a bit of price support for AXP, especially in the wake of a strong first-quarter earnings report.
While there clearly is trepidation among short sellers and the brokerage community, there appears to be outright disdain for AXP among short-term options traders. Specifically, put open interest totals roughly 42,000 contracts in the April/May series of options, vs. call open interest of about 24,000 contracts. The resulting April/May put/call open interest ratio arrives at a bearishly skewed 1.78, as puts nearly double calls.
The majority of AXP puts are centered at the overhead April 65 strike, where some 8,500 contracts reside. Another 5,100 puts are open at the April 62.50, and nearly 5,000 are open at the April 55 strike. On the call side, 8,200 contracts are open at the out-of-the-money April 65 strike, followed by 4,200 at the April 67.50 strike.
Checking in with implieds, April options are indicating expectations for a post-earnings move of about 2.2%, compared to AXP’s historical volatility of roughly 1.3%. In other words, options premiums are expectedly higher than normal ahead of the company’s quarterly report. The 2.2% expected move puts the 62.50 put and 65 call strikes within reach, while the 55 put and 67.50 call strikes would need a major surprise to finish in the money.
Click to Enlarge Technically, AXP has been in a slow but steady uptrend since the end of November. The stock has rallied more than 18% during this time frame, bolstered by support at its 10- and 20-day moving averages. Current market weakness has AXP pulling back below these trendlines, however, with the shares currently perched on key support at their 50-day moving average in the $64 region.
Given the low expectations for American Express’ quarterly report despite prospects for a strong quarter for the company’s more affluent consumers, I’m inclined to bet a little bullish on the company ahead of its first-quarter announcement. The stock’s long-term uptrend and short-term pullback to key technical support only serves to reinforce the my upside bias.
Working with the expected 2.2% post-earnings move, options traders might want to consider a May 62.50/67.50 bull call spread. This spread was offered at approximately $2.31, or $231 per pair of contracts, at the close of trading on Tuesday. Breakeven lies at $64.81, while a maximum profit of $2.69, or $269 per pair of contracts, is possible if AXP closes at or above $67.50 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.