NEW YORK (AP) — Analysts remained cautious about American Express Co., even after the credit card lender on Thursday reported a better-than-expected profit during the first quarter.
Three analysts maintained "Underperform" ratings on the stock despite the surprising first-quarter profit. But, all three analysts increased their price target to reflect the earnings report.
Friedman, Billings, Ramsey&Co. analyst Scott Valentin increased his price target to $16 from $10. Credit Suisse analyst Moshe Orenbuch increased his price target to $17 from $12, while Jefferies&Co. analyst Richard Shane increased his target to $18 from $12.50.
For the January-March period, American Express earned $361 million, or 31 cents per share, after paying preferred dividends. Analysts polled by Thomson Reuters, on average, forecast earnings of 12 cents per share for the quarter.
In premarket trading Friday, shares of American Express jumped $1.30, or 6.2 percent, to $22.27. Shares closed Thursday at $20.97 before the company reported first-quarter results, which came after the market closed.
Analysts widely attributed the better-than-expected quarterly results to strong expense cuts by American Express. FBR's Valentin said expenses were $440 million less than he projected, which improved earnings by about 25 cents per share.
CreditSuisse's Orenbuch said the $3.6 billion in quarterly expenses was $600 million less than he had projected, driven by lower marketing and salary costs.
American Express said it is trying to cut $1.8 billion in expenses in 2009, including plans to reduce staff during the second quarter. In October, AmEx announced plans to cut 7,000 jobs, or about 10 percent of its global work force.
Despite the cost-cutting measures to help improve profitability, analysts are worried about continued deterioration in American Express' credit quality. Loan losses continue to pile up as the economy worsens and card spending is declining as consumers cut back on purchases.
In a research note, Jefferies' Shane said a slowdown in spending volume remains one of American Express' biggest risks.
A slowdown in spending and rising loan losses are likely to continue, putting pressure on American Express in future quarters, analysts said.
American Express took a $1.8 billion provision for loan losses, 49 percent higher than its provision in the first quarter last year. It saw its loan-loss rates in its U.S. card business nearly double to 8.5 percent from 4.3 percent a year ago on a managed basis, which includes card loans that are packed and sold as investment securities.
"We believe that credit costs will remain elevated, particularly for those companies, such as American Express, that are exposed to markets that have seen steep increases in unemployment rates and home price declines," Valentin wrote in a research note.
During recessions, credit card losses often track similar to unemployment rates. American Express said it expects unemployment to reach 9.7 percent by the end of the year. Valentin said that outlook is more optimistic than FBR's unemployment forecast.
