Credit has been all the rage during the most recent expansion. Americans have taken heed by not leaving home without it. For years consumers have gotten fat on easy credit.
Now, the bill is coming due in the form of higher interest rates, higher taxes and lower value in the stock market.
Our addiction to debt fueled a false economic expansion that has come crashing back to earth. Companies that thrived on consumer borrowing have struggled during the recent credit crunch with much of the focus on those providing home mortgages.
What about the credit card companies? Will we see the same levels of defaults on credit that we saw in the sub-prime market?
Companies like Capital One (COF), Mastercard (MA), and American Express (AXP) may be vulnerable to the same sort of crisis that destroyed some of our biggest banks, investment banks and insurance companies.
At least that is what investors are telling us. Share prices for these companies have dropped significantly with AXP giving up more than 50% of its value over the last year. Clearly there is concern that a weak consumer will wreak havoc on the future profitability of credit card companies.
After the close of trading on Monday, AXP may put those concerns to rest. In the release the company stated that its profits had dropped by 24% in the third quarter legitimizing the argument of the bears.
That said, AXP did beat Wall Street expectations. The company made $815 million, or $0.70 per share, versus the estimates of $0.59. This was an easy beat that should put a floor on AXP shares.
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Indeed, the after hours response to the news has been impressive with AXP up more than 8.5%. Such a move was impressive given that shares gained more than 4% in regular hours. Even so these gains are far from recovery the value lost during the last year.
More troubling is that these results do not give us the all clear going forward. In fact, the company merely echoed the trend in the industry noting the difficult time consumers are having with their debts.
One of the supposed protections for AXP is that they cater to a supposedly well-heeled client. Even in a downturn these higher net worth consumers would see little change in spending habits.
That does not appear to be the case with this recession. There truly is no place to hide, and all income classes are being hit hard by the slow or negative growth. The company stated that conditions are likely to get worse before they get better.
If so we could se another leg down here with AXP no matter how good the news was in the short term. Then again we may be seeing a classic case of lower the bar that would then set the stage for future earnings beats down the road.
I guess it depends on your outlook. For me I’m starting to believe that the contraction of late is setting us up for a major rally that would be based on beating drastically reduced expectations combined with higher spending due to pent up demand.
We will eventually turn the corner and AXP may be a bargain in advance of such a turn.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
