Ahead of the Trend: American Express to Report Earnings Today
DEBORAH MARCHINI, CNN ANCHOR: Keeping you "Ahead of the Trend" this morning: American Express is expected to report its second- quarter earnings today. Here with a preview of just what to expect from the Dow component is Meredith Whitney, brokerage analyst at First Union Securities. And they kind of tipped their hands on this one, Meredith, didn't they?</s>MEREDITH WHITNEY, FIRST UNION SECURITIES: Yes, they did. They preannounced last Monday, so there's not going to be a lot of new news here. There will be another conference call at 5:00 today. But they discussed most of the material issues last week, which was -- the biggest surprise was that they were going to lay off about 5,000 people. And this has been a company has not done bad in the past.</s>MARCHINI: Does that tell you things are really looking worse than anybody thought?</s>WHITNEY: I think, actually, it's a good sign, because it tells me that the company is coming to grips with what it needs to do. It has got the most expensive operating infrastructure of any of the card companies, and I think addressing those issues of cutting costs. And I don't actually 7 percent of the work force is enough. It's a step in the right direction. But this business model is so leveraged to transaction volume. And people just are not spending. Certainly, corporations are not spending the way they had. So volumes have dried up. There was another issue that they had a $826 million write-down -- that's 7 percent of their book value -- relates to high yield. That relates back to their credibility. This is the third write-off for them.</s>MARCHINI: Yes. Is that one of the things? And are there other items that you'll be looking to press or hear more about in the 5:00 conference call?</s>WHITNEY: The most interesting thing for me tonight will be -- the model at American Express is changing dramatically. Ten years ago, if you wanted to buy a fur coat at Neiman Marcus, you would use your American Express card. And the way the company makes the most money is by their network fees -- so the discount that they charge a merchant for using their card services. Today, that market is really saturated, so new growth in the company comes from grocery stores. They make materially less when someone buys a 12-pack of toilet paper at Costco than a mink coat at Neiman Marcus. So the discount revenues -- which is the money they make off the merchants, their highest profit vehicle -- has changed dramatically and has dropped considerably over the last several years.</s>MARCHINI: This being a financial services company, one might have expected that after a half-dozen rate cuts by the Federal Reserve, the stock would be trading closer to a high. In fact, it's closer to a 52-week low. It -- what -- finished on Friday at 34 -- at $38 roughly. And the low was $34. What's the prognosis?</s>WHITNEY: I would argue that the stock still has to go lower. The reason why the stock is up at $38 today is because there is massive take-out speculation. And the company is attractive on two levels. It's got capital, which is a big factor going forward as more and more bank consolidation requires more companies to have greater capital bases. And it's got this very heavy expense structure.</s>MARCHINI: It is huge, though. Who would buy it? And would Sandy Weill sell?</s>WHITNEY: I think that Morgan Stanley would be interested, because it's got half the operating structure that American Express has. And it needs the capital. But Morgan Stanley has troubles of its own with the rest of the brokerage universe. People speculate AIG just because it's a big high-multiple stock. But I don't think it's going to get bought anytime soon. And if it does get bought, I can't imagine it gets bought for more than $34 or $35 a share. So at $38, there's not a lot of outside.</s>MARCHINI: No, there sure isn't. Meredith Whitney, brokerage analyst at First Union Securities...</s>WHITNEY: Thank you.</s>MARCHINI: ... providing us with a fascinating look inside American Express today. Thank you.</s>WHITNEY: Thanks. TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com