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On Feb 27, we reiterated our recommendation on American Express Co. (AXP - Analyst Report) (AmEx) to Neutral, based on its steady growth momentum and prudent capital management that augurs higher shareholder return. However, higher provision for losses and higher marketing expenses raise some concern.

Why the retention?

Estimates for AmEx, which focuses on financial card services, have remained steady since  the company reported its fourth-quarter 2012 results on Jan 17. The company’s earnings of $1.09 per share were at par with the Zacks Consensus Estimate, although revenue of $8.14 billion marginally exceeded the same benchmark.

Meanwhile, both top and bottom line surpassed the year-ago results, based on growth in card spending and improved loan portfolio, which were partially offset by escalated expenses and provision for losses.

Following the release of the fourth-quarter results, the Zacks Consensus Estimate for 2013 remained consistent at $4.75 per share in the last 30 days. However, the Zacks Consensus Estimate for 2014 edged up 0.9% to $5.33 a share. With the Zacks Consensus Estimates for both 2013 and 2014 showing no clear directional pressure on the stock in the near term, the company now has a Zacks Rank #3 (Hold).

AmEx has been experiencing impressive recovery in credit trends, with increased card spending and strong billings over the last several quarters. Moreover, the company continues to focus on tapping rapidly developing international markets through strategic acquisitions and alliances along with development of products and technological services, which are also becoming a source of a diversified revenue mix.

Further, persistent improvement in loss rate continues to reflect progress from improved credit quality. However, we expect the recovery to be tempered by the volatile global economy, sluggish interest yields, higher marketing and other cardmember reward expenses as well as intense competition faced in the card industry.

Other Financial Stocks That Warrant a Look

While we see no clear directional pressure on American Express in the near term, other stocks in the financial sector that are outperforming include Moody’s Corp. (MCO - Analyst Report), XL Group Plc (XL - Analyst Report) and Navigators Group Inc. (NAVG - Snapshot Report). All of these carry a Zacks Rank #1 (Strong Buy).

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