Option Trade 
American Express Company (NYSE:AXP) Calls
Tuesday, January 17, 2017

** OPTION TRADE: Buy the APR 21 2017 80.000 call at approximately $2.00. Place a pre-determined sell at $4.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.80.

by Ian Harvey

Tuesday, January 17, 2017

Payment processor American Express Company (NYSE:AXP), together with its subsidiaries, providing charge and credit payment card products and travel-related services to consumers and businesses worldwide, is scheduled to post its Q4 numbers January 19. The company will report its quarterly results after the market close, with the consensus calling for earnings of $0.99, and revenue of $7.9 billion.

For 2016, AXP is expected to post EPS of $5.75, compared to $5.38 in 2015. For 2017, the company is expected to see the positive effects of its restructuring initiatives and it’s spending on reviving partnerships, especially in US markets, which should translate to EPS of $5.61.

American Express posted EPS of $1.2 in 3Q16, helped by higher spending and better expense management. It posted total revenue net of interest expenses of $7.8 billion in 3Q16, compared to $8.2 billion in 3Q15.

Excluding the impact of the termination of its partnership with Costco Wholesale (COST), American Express managed a rise of 5% in revenue, reflecting the impact of its spending on new initiatives and partnerships.

The stock has trended strongly higher since the presidential election, and with the recent gains has appreciated 10.9% over the last year.

Enthusiasm is high for the company, particularly following the recent presidential election. Not only will the company benefit from rising interest rates, but also from higher corporate spending, and expected tax reforms once president-elect Trump takes office.

The company has strung together four consecutive earnings beats, and a fifth beat should allow the stock to build on its recent gains.

American Express Company has a 12-month low of $50.27 and a 12-month high of $78.00. The firm has a 50 day moving average of $74.06 and a 200 day moving average of $66.89. The firm has a market cap of $70.22 billion, a P/E ratio of 13.63 and a beta of 1.20.

Factors to Consider

American Express Company surprised the market in 2016 with the rate at which its business improved. Management entered 2016 with goals to stabilize the company's revenue and earnings following the loss of exclusive relationships with the likes of Costco Wholesale Corporation (COST) and JetBlue Airways Corporation (JBLU). In many respect, its mission was accomplished.

Thanks to improvements in segments like International Consumer and Network Services, American Express is coming off a strong third quarter in which revenue of $7.77 billion topped forecasts by $50 million. In addition to beating on both the top and bottom lines, American Express raised its full-year guidance.             

All told, with four straight earnings beats and counting, American Express has tons of momentum heading into 2017. Assuming the company can keep costs in line while boosting earnings and revenue, American Express shares could reach $85 in 2017, delivering 15% returns.

American Express has lagged the financials rally post-election (+13.6% vs. +17.3% for the Financial Select Sector SPDR ETF (XLF)). A good deal of the structural headwinds is priced into the multiple. Also, AXP is not rate-sensitive and that a strong USD is a headwind. With all that said, there are plenty of positives….

1.       T&E spending should begin to rebound over the next six months (26% of US billed business);

2.       Attrition still low;

3.       Not levered to rates, but definitely levered to GDP;

4.       Rewards war is leveling off;

5.       Will still benefit from any potential tax policy changes.

Analyst Input

Recently, Bank of America Merrill Lynch (BAML) analyst Kenneth Bruce raised his rating on American Express to Buy from Neutral and increased his 12-month price target to $90 from $78. The $90 target makes BAML's view the most bullish call on American Express, which has a consensus price target of $75. Prior to Bruce's upgrade, the highest price target on the stock was $87.

Bruce’s price target assumes additional premiums of around 19%. The shares, which have rallied some 23% in the past three months, have risen 2.40% year to date, besting the 1.44% rise in the S&P 500 (SPX) index.

A day Oppenheimer analyst Ben Chittenden upgraded the credit card company to Outperform from Perform and issued a Street-high price target of $98. Notably, this new price target comes even as shares of American Express have already risen some 13% since the Nov. 8 presidential election. In fact, it's for that reason that Chittenden, who cites improving corporate spending and Donald Trump's tax reform plan, believes investors should own American Express.

Harvey’s Options Volatility Indicator

Conclusion

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the APR 21 2017 80.000 call at approximately $2.00. Place a pre-determined sell at $4.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.80.

 ”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!

Options traders are not successful because they win.

Options traders win because they are successful.

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