July 16 (Reuters) - J.P. Morgan upgraded American Express Co (AXP.N) to “neutral” from “underweight,” saying it sees falling network revenues at the largest U.S. credit card company to be outpaced by lower expenses and provisions.
“We maintain rising unemployment, a spiking savings rate, and a slow return for business spending will retard revenues through 2010, but expense savings will allow the company to achieve its goal of remaining profitable through this credit cycle,” JP Morgan said.
The upgrade comes a day after the company said U.S. credit card defaults grew less-than-expected in the second quarter and could be lower-than-estimated in the second half. [ID:nN15352318] [ID:nN15343757]
Following previously announced expense cuts, the company’s comments on Wednesday should strengthen near-term earnings expectations, said the brokerage, which raised its price target on the company’s stock to $25 from $16.
American Express was the fastest growing credit card company during the credit boom of 2003-07, but the company paid a heavy price when the bubble burst last year.
Mounting credit losses sent its earnings spiraling lower. Since then, American Express has been slashing lending, trimming expenses by $2.5 billion — including 11,000 job cuts — and divesting to shore up its balance sheet.
On Wednesday, American Express said it halted its contributions to employees’ pension plans in the United States and the UK, as part of a restructuring process to slash costs amid mounting credit losses. [ID:nN15379058]
It is the only credit card company that did not cut its dividend and the only one that remains profitable, according to quarterly reports.
However, JP Morgan said it still expects normalized earnings levels at the company to disappoint as discount revenue fails to grow on the back of a weakened consumer, smaller credit card portfolio.
Separately, Sandler O’Neill raised its price target on the stock to $20 from $17 to reflect the improved earnings outlook, but kept its “sell” rating on concerns related to consumer spending and leverage. [ID:nWNAB7640] (Reporting by Mary Meyase in Bangalore; Editing by Himani Sarkar)