American Express Bull's Rebuttal
by Paul Larson ([email protected])

If this Duel were the World Series and my associate Bill were pitching, he would have thrown a slow, hanging curveball with his initial argument. Bashing American Express because of the way the old card program worked is completely outdated. The company has greatly expanded its product offerings, and American Express now has a wide range of cards available, many of them with no annual fee. Of course, the traditional American Express Card has its hearty niche and is still going strong, but it is far from the only card available from the company today.

Do you like the fact that Discover Card has its cash-back bonus? American Express now has a card offering essentially the same program. Like earning frequent flier miles from using your credit card? The Delta SkyMiles Card is for you. Want a regular credit card with a low introductory rate? Check out the Optima Card. It should be clear that American Express is not only offering The Card these days.

Bill then goes on to point out that American Express' market share declined from 1989 to 1996. Point taken. But what about 1996 to 1998? Or 1998 to 2002? Like I stated in my initial argument, American Express has actually seen its share increase in the recent past for the first time in a long time. Furthermore, the entire credit card market has seen some explosive growth over the past decade. Having a smaller portion of a larger pie isn't necessarily a bad thing.

I don't care much about the mistakes American Express may have made in the early '90s; I only care about what the company is going to do in the future. Looking at the credit card landscape, it's rather easy to envision the company's market share continuing to bounce back to impressive levels, especially if the Department of Justice's case opens the door for American Express to offer its card with banks across the nation.

Knocking American Express for offering underperforming mutual funds that charge high fees? It's all a matter of perspective. Remember, what's bad for the hen is normally good for the wolf, and we're discussing the wolf's fortunes here. I'm not even going to discuss the validity of investing in actively managed funds. That was done another time. Who knows, maybe Amex will get Foolish and start offering its own family of index funds in the near future. Management has replaced the mistakes of the past with new opportunities in their credit card business; why not think they will do the same with their funds?

On another point Bill brought up, the past top line growth did not exactly explode, but earnings growth has been significantly larger. Why not look at the 30% annual EPS growth over the past five years instead of just the top line? In addition, the company plans on continuing its share buyback plan. Unlike capital-intensive industries, much of the Express' cash flow is of the free and clear kind, which can be used for either dividends or share repurchases.

In short, Bill's argument would have made a lot of sense if it were written in 1992. But this is 1998, and American Express is poised for a bright future indeed.

Next: The Bear Responds