The problem with Wall Street research is that it so focused on the short term. They completely missed the mess we are in because at the beginning of 2007 everything was great. Earnings were going up and the economy was doing fine. They completely ignored the fact that profit margins were way above historical norms and that there were major structural imbalances developing. All that mattered was the next quarter.
This continues to be the problem with Wall Street research. This morning Goldman Sachs downgraded American Express to Conviction Sell with a $7.50 price target. The reason being that they expect credit losses to be more severe for 2009 and 2010. They are assuming credit losses as high as 12%, which is much higher than anyone out there is estimating. Even under those assumptions they still expect American Express to earn $0.50 in 2009, $0.70 in 2010 and $1.80 in 2011.
It is not even a point of contention that American Express made some horrible loans and that there will be losses related to those loans. But even under these horrible conditions American Express will still earn money in the next two years and bounce back to earnings of $1.80 in 2011, with its credit woes behind it. How is a company that will earn $1.80 in 2011 only worth $7.50? That is four times earnings. Last year Goldman had American Express as a buy with a $70 target? This is coming from the same group of people who gave you 100 times earnings price targets on tech stocks. The more things change, the more they stay the same.
On a side note, I still own American Express. I decided to hold on as I believe this rally has more to go. Then it got with this downgrade this morning. Shit happens. The good news is that there are few analysts that can downgrade the company as most have them as a sell. I have a sell rating on Wall Street research.