American Express (AXP) – Is Credit Due?

by CC September 15, 2017 3:24 pm • Trade Ideas

Recent breakouts to new all time highs in online payment stocks like Paypal (PYPL), Square (SQ) and Shopify (SHOP) got us looking around. For instance, is the good news in payment processors also good new for the credit card stocks? Mastercard (MA) and Visa charts sure reflect alot of good news, with both in uncharted territory to the upside. But the one chart that stuck out in particular was was American Express (AXP). AXP is up 17% in 2017, and up significantly from its 2016 lows:

But the more interesting chart is the one showing its 2014 highs. Those highs look like a realistic target with the stock approaching, especially while its brethren continue to put in new highs:

AXP sports a $77 billion market cap, the company is expected to grow sales 3% this year to $33bn. Compare that to PYPL which is up 55% ytd with a market cap very near AXP at $75bn, despite PYPL only expecting to book $13bn in sales. Investors are clearly paying up for growth, as PYPL sales, growing at 19%, are much sexier than AXP’s. But valuations reflect this with AXP trading 15x earnings, and 2.3x sales versus PYPL at 34x and nearly 6x sales. Comparing AXP to its peers in MA and V, they both have double-digit earnings and sales growth, but stocks that trade 30x, double that of AXP.

The next identifiable catalyst for AXP will be Q3 earnings in mid Oct. This could be the catalyst for investors to re-rate the stock and for it to take a run it its previous highs. Consensus expects AXP to grow eps 10% next year with sales 5%… a beat and raise next month and the stock is on its way back to 95.

And volatility is quite low, meaning directional bets to the upside are dollar cheap:

So What’s the Trade?

Let’s keep it simple, defined risk bullish:

AXP ($86.80) Buy Oct 87.50 call for $1.40

Break-Even on Oct Expiration: Unlimited profits above 88.90 (up 2.3%). Losses up to 1.40 below 88.90 with a max loss of 1.40 below 87.50.

Rationale – This trade risks 1.6% of the underlying and plays for a move back to highs with unlimited potential on a breakout above those prior highs. If the stock creeps up into the earnings this call can be spread with the sale of the 95 (or higher) Oct calls, reducing overall risk.