Stock Watch

American Express: Charging Ahead

Shares of financial-services company American Express (AXP) are down slightly for the year, but they look like promising performers for 2006.

Amex completed its exit from fund management and financial planning in September. Investment management can be a terrific business, as companies such as Eaton Vance and T. Rowe Price have demonstrated. But the fund business wasn't Amex's strong suit, so good riddance.

Now investors have a purer play on Amex's world-class card business. Amex cardholders spend thousands more each year than bankcard users do, so Amex is more profitable than other card issuers. Moreover, Amex's reorganization should lead to a higher return on equity, a measure of corporate profitability.

Plus, Amex is having success signing up banks to issue its cards. Citibank announced December 20 that it would offer a new line of Amex cards starting next year, then Amex announced December 21 a partnership with Bank of America to issue cards under the Bank of America brand.

Morningstar analyst Ryan Batchelor says he likes the deals. He says they should serve shareholders well "because they require very little capital and almost all the revenue Amex receives from these arrangements drops straight to the bottom line."

The stock, which is trading below its 2000 high, sells for 17 times estimated 2006 earnings of $2.96 a share.

--Jeffrey Kosnett

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