MAD MONEY FEATURES
PODCASTSWatch the Lightning Round whenever and wherever you want.
OFFICIAL MAD MONEY WIDGETGrab this all-in-one application and get recaps of the show sent right to your desktop or blog.
CRAMER'S SOUNDBOARDAdmit it: You’ve always wanted to hit the “They know nothing!” button. Here’s your chance.
CRAMER QUICK PICSCheck out the Mad Money host on set, back to school, behind the scenes and more.
VIDEOSGet all your favorite Cramer clips right here.
SHOP FOR MAD MERCHANDISEBuy Cramer books, bobbleheads and other Mad Money merchandise.
RING TONESPick up the phone! It’s Cramer! New Mad Money sounds for your cell phone.
TEXT MESSAGE ALERTMad Money’s mobile. Get show highlights sent to your phone.
Text Size 
 |
Don’t confuse this credit-card company with Visa [V
Loading...
()
]or Mastercard [MA
Loading...
()
]. They’re just a play on the switch from paper to plastic. They don’t lend money. American Express [AXP
Loading...
()
] does. AXP’s more on par with Capital One [COF
Loading...
()
] and Discover Financial Services [DFS
Loading...
()
], but even these two are outperforming the former.
American Express is number four in the credit-card business behind JPMorgan Chase [JPM
Loading...
()
], Bank of America [BAC
Loading...
()
] and Citigroup [C
Loading...
()
]. The difference here, though, is that AXP has no deposit base to fall back on. The three banks do. Again, even Capital One and Discover, numbers five and six, respectively, pull in 40% of their funding from deposits. AXP is 60% funded by unsecured debt, with the other 40% coming from asset-backed securitizations.
That’s a heck of a turn for a company that originally never lent money at all (and therefore didn’t need to borrow – during a credit crisis, mind you – to make that happen). Remember how you always had to pay off your AmEx balance every month or suffer a penalty? Well, in 1987, the company moved from charge cards to credit cards and now 32% of earnings come from interest income. Another 5% comes from the travel division, and neither of these are good businesses right now. And while 29% of the money AXP brings in comes from small-business lending, which isn’t hurting like the other divisions, it is a part of a company that’s attached to retail. So even the fees American Express collects from store credit-card transactions will be down as consumers pinch pennies to survive this downturn.
It’s not just that American Express is lending money without in-house access to cash. It’s that AXP is lending to some of the worst possible demographics. Thirty-two percent AmEx cardholders are high risk. Compare that to Discover’s 15%. And then there’s AXP’s spending volume, which has big exposure to California and Florida, 17% and 9%, respectively, two of the worst housing markets in the U.S. Those numbers are bigger for AXP than they are for any of the other top-five card issuers, Cramer said.
Here is another couple of facts to add to the list of AXP negatives: Not only is the company’s loss rate growing faster than its peers, it doesn’t have adequate reserves to meet those losses. Last quarter, American Express saw its loss rate increase by 2.8 percentage points compared to the peer group average of 1.8. For the quarter ending in June, AXP’s reserves accounted for only 60% of loan losses, while Capital One and Discover reserves represented 80%. Plus, AXP’s average loan charge-off is 50% than the 2003 to 2007 average.
All of this has Cramer thinking the $2.92 AXP’s expected to earn in 2009 is too high. Now, he doesn’t think the lowest analyst target of $2.25 is right either, but it does give you an idea of how far off the consensus estimate might be. American Express, now at $32 and change, could fall as low as $25, Cramer said. And there’s a good chance the company could be taken over at that point.
So American Express is in the Sell Block. If you own the stock, get rid of AXP on any strength.
Questions for Cramer?
Questions, comments, suggestions for the Mad Money website?
Del.icio.us
Digg It
Data is a real-time snapshot *Data is delayed at least 15 minutes