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American Express Credit Card Consumer Complaint

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American Express Credit Card Consumer Complaint Powered By Docstoc
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Joseph Bonifaz
Stephanie Giangrande
Michael Naraine
Shaun Pfister
Pavel Tamarin
                               2



Table of Contents
• Share Price Drivers
  ▫ Current Events
  ▫ Consumer Spending
• Stakeholders
  ▫ Claim, Control, Interest
  ▫ Bankruptcy?
• Competition
  ▫ Porter’s Analysis
• Free Cash Flow Metrics
• Conclusion
                                3


American Express?

• AMEX Credit / Charge Cards


• AMEX Travel Agency


• AMEX Publishing Corporation


• AMEX Centurion Bank Ltd.
                                                                                             4
CLAIM                         CONTROL                                     INTEREST
                                                                              Oil Prices


                   67,700                                                        Pension
 Employees                    Government                      67,700
                 Salaries,                                               c       Fund
                  Bonuses


                                                14 people
                  $3.4B of     Board of
                                              including Ken
                                                         Every store,
Government         TARP        Directors        Chenaultrestaurant, etc   c Employees
                                                  (CEO)

                                                  Heavily
Bond Holders ,    Interest       Voting         influences
                                                        Various Cards
   Banks                      Shareholders    credit interest            c Government
                                                   rate


                 Dividends    Federal Bank                96M in force
 Suppliers                    Interest Rate                              c Shareholders



 Customers                    Taxpayers                                        Merchants



 Preferred                                                                        Business
Shareholders                                                                      Partners



  Common                                                                          Card
Shareholders
                                                                                 Holders
                           5

What If Bankruptcy?

• Government

• Employees

• Bond / Debt Holders

• Banks (Credit Lines)

• Preferred Shareholders

• Common Shareholders
                                      6

What’s at stake with Amex?
• American Express (Itself)
    ▫ Credit / Charge Card Business
    ▫ Bank
    ▫ Travel Agency
•   Credit Industry
•   Small Businesses
•   Government
•   Marketing Agencies
•   67,700 Employees
•   Suppliers
    ▫ Producers of plastic cards
    ▫ Chip technology
• Consumers
• Investors
                                                                    7




Consumer Spending vs. American Express
 • On January 8, 2009, American Express (AXP) put out a startling
   press release in which they stated that American Express card
   member spending began to slow and delinquencies and
   write offs trended up in December
                                                            8


   Consumer Spending Cont’d
• Worldwide card member spending increased 13%
• Delinquencies on US card balances also increased from
  2.9% to 3.2% and write offs increased from 3.7% to 4.3%
  in the 4th quarter
                                                    9




AmEx cuts spending limits
• America Express was reportedly cutting
  customers spending limits, and closing accounts
  in early October
• Cuts were made according to how often and
  where consumers used their cards
• During the week of these announcements AmEx
  stock slipped more than 12 points
                                             10

Company News: AMEX converted to
Bank Holding Company
• On November 10, 2008 American Express
  converted to a bank holding company
          Share the
• This enables price company to receive
  approximately $3.4 billion in TARP funds
             fell
         ~$6/share
          (20%) to
           $20.05
                                                   11



Back to Basics
• AmEx is focusing on consumers who pay their
  balances every month
• Tightening grip on customers they once courted
                                                  12



$300…We’ll Call it Even

• AmEx offers cardmembers $300 to pay off their
  balances
• Accounts will be closed after debt is settled
        Causes and Effects of Consumer Spending
                                            13




   Interest Rates - Influence cost of borrowing and
    mortgage
                                  Decrease in
      o Interest payments - Higher interest rates lead
                                  household
                                 expenditures
        to lower spending
                    Mortgage
                     Defaults
                                 prices are
    House prices - When house Foreclosures rising
     Decrease
     Consumer
    people are more confident to spend
     Spending
                                  Less credit
   Consumer Confidence
                   Lack of Faith
                   in Economy
                                 available for
                                               Savings ratio
                                                increases
                                  consumers
   Difficulty / ease of borrowing money
   Tax rates - A cut in income tax would give
    consumers more disposable income
                                    14

Consumer Spending vs. Stock Price
                                                         15

Profit: As a Share Driver
   AXP’s profit greatly effects it’s share price
   Remarkable profit increases or decreases correlate
    to increases/decreases of its share price
   Example:
            $37.99 (10%
               drop)




                           Volume:
                          48,554,300
                                                                    16



Consumer Spending vs. AmEx
• On January 8, 2009, American Express (AXP) put out a startling
  press release in which they stated that American Express card
  member spending began to slow and delinquencies and
  write offs trended up in December     Charge Off
                                                         4.5%
                                      Rate %

                                                             3.5%
                      2.7%

                                               30 Day Past
                   2.2%                          Due %



     2006                    2007               2008
                                                        17

AMEX vs. Industry, S&P 500
   Seen in the following graph, AMEX stock price
    follows the same trends as its respected industry
    and the S&P 500

   Note: AMEX being more volatile (check β) than
    the market
                                          18

AMEX vs. Industry, S&P 500 Cont’d

                           S&P 500

                            AXP Stock
                            Finance Ind
                                                   19




Earnings
• Jan 27th – AmEx posts an unexpected quarterly
  profit, outperforming forecasts
                                     1/28/00 –
• Stock jumps 10%, enough to boost the Dow
                                    Share Price:
  Jones Industrial Average             $17.85




         1/26/09 –
        Share Price:
           $15.20
                                                      20


Earnings Cont’d        4/5 Quarters’ stock prices
                        matched their earnings


    Quarter       Earnings        Change in Stock Price


    2007 Q4        +$0.71                 -$0.06


    2008 Q1        +$0.84                 +$2.71


    2008 Q2        -$0.54                 -$1.56


    2008 Q3        +$0.74                +$0.67


    2008 Q4        +$0.21                +$2.65
                                                    21




Securities Fraud
• Company executives violated federal securities
  laws.
                            Gap
• Specifically, the Complaint alleges that
                            Dow
  defendants' public statements, misled investors
                            n

• Falsely representing American Express's
  exposure to the riskiest credit card holders
                                                                22


House Price Declines
 • Recent home price declines >30% in some of their top
   spending areas
 • Credit deterioration has been widespread and hurt AMEX in
   their core business
 • AMEX is more heavily exposed to the decline in home prices
    ▫ 5-11% greater exposure to CA/FL markets
    ▫ Delinquency rates 3x greater than the national average
    ▫ AMEX’s higher-end customers are suffering 1.3 times
      greater losses
                                                               23



AMEX Updates: 2008
• Earnings fell 79% to $172 million (15 cents a share) as of
  1/26/09
• Compared from $831 million (72 cents a share) one year ago
  (1/26/08)
• Average basic card member spending declined 13 percent to
  $2,758 from $3,161 in 2008
                                                                  24



Cards in Force
  CIF is the number of American Express cards issued (including
  supplements), which has grown over 30% annually since
  2004.

  Total transaction volumes
  increased at an even faster
  rate (46% per year).
                                       25




Rivalry Amongst Existing Competitors
                  Threat of
                new entrants          -Requires enormous
                                      amounts of liquidity
                                     -Only large companies
                                        with established
                                           networks                           Bargaining
Bargaining                                                                     power of
 power of                                                                     Customers
 Suppliers
                                           AMEX
                                          Discover
                                          Visa Inc.             -Lower payments
             -Market conditions                                   + interest rates
                                         Mastercard
               -Interest/Bond                                       -Eliminate
                    Rates                Capital One                 penalties
             -Supply of liquidity           BofA                -Large credit lines
                                            Citi
                                            JPM




                                    Cash, Check, Debit Cards,
                                      Other Loans (Bank),
                                     Money order, Deferred
                                       payments, Online
                                        payment services
                                                                    Threat of
                                                                   Substitutes             26
   Free Cash Flow (in billions)
               AmEx        2008             2007       2006
          Cash Flow        $8.67           $8.491      $9.112
          (Operations)
          - Cap. Exp.      $.977            $.938      $.832
          = FCF            $7.689          $7.553      $8.28


                               Note: In Billions

Company           AmEx     Discover         Visa    Mastercard   Capital One

Cash Flows
                  $8.67      $4.5           $.531     $.413        $3.48
(Operations)
- Cap. Exp.       $.977     $.093           $.415     $.170        $.356
= FCF (2008)      $7.689    $4.41           $.116     $.243       $3.126
                                                                           27
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Review
• Share Price Drivers
  ▫ Current Events
  ▫ Consumer Spending
• Stakeholders
  ▫ Claim, Control, Interest
  ▫ Bankruptcy?
• Competition
  ▫ Porter’s Analysis
• Free Cash Flow Metrics
                                               29



Avoid American Express
• Bad Macro Environment
 ▫ Decrease in Consumer Spending
 ▫ Increase in Unemployment
• Credit Card Crunch
 ▫ Consumer credit lined being cut
• Deteriorating Asset Quality
 ▫ Rapid growth between 04-07  faster asset
   quality deterioration
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