A brief financial analysis lesson, slight return

As you may know, periodically on the blog I provide financial analysis lessons.  Today’s lesson uses American Express as a case study.  That staid charge card issuer has just changed the date in which payments are due each month.  It used to be that payment was due around the 27th of the month.  Then with no fanfare, this month payment changed to around the 14th of the month.  Why would AMEX do this?  And what can we learn about the state of AMEX from this?

First of all, by moving payments earlier in the month, now just two weeks after the close of a bill, as opposed to almost 4 weeks after the close of the bill, American Express improves its float.  By getting client payments two weeks earlier each month, American Express now gets use of that money earlier.  Typically cash flows like this are deposited immediately and begin earning a return for a business.  Does this make sense?  I hope so.  But this doesn’t answer the question of why AMEX would make this move now.

The only real reason to make this change after so many years of a different policy would have to be that AMEX needs to make the change.  Yes, its good that the company has found an additional way of increasing its profits, but the question is why now?  As a former portfolio manager of a mutual fund I can only conclude that AMEX is trying to improve their fourth quarter operating results.  And that must mean that they are off of their targeted earnings in the quarter.  So, as an investor, this is the sort of anecdotal evidence that exists, ripe for the picking, if only just focus your eye to finding it.

The other thing that I want to highlight is that AMEX used to include the monthly balance you owed in its customer e-mail alerts.  This month, the date changed with no warning and now they don’t tell you how much you owe.  Why would they do that?  For this one, it is harder to say.  But my guess is that the two new policies taken together may be trying to generate excessive, and very profitable, late fees for American Express as they catch their customers in a billing surprise.  Nice!  Here, the insight garnered as an investor, is that AMEX has crossed an ethical threshold that they previously were unwilling to cross.  And why would they do that?  It adds support to the idea that they may be more desperate to generate profits.  And that means that they probably are having difficulty making their fourth quarter numbers.

For a charge as strong as the ethical one I suggest above you would want verification.  That verification could come by listening to an AMEX conference call and assessing the mood, modes, and character of management.  It may be that AMEX will later restore the “amount owed” to their e-mails and that this was an oversight.  However, that is not my assessment.

To summarize, from the one piece of information that AMEX has changed its bill due date we can conclude a lot.  All without breaking out a calculator and all without a phone call to the company’s Investor Relations department.  This sort of analysis makes use of both sides of the brain, left-analytical, and right-intuitive.  The left brain notices the change in the billing date.  The right brain assesses why from amongst all of the possible reasons AMEX would make this change.  In doing that work, the right brain relies upon the knowledge that many businesses try and win the “float” battle with their customers.  The left brain also knows that company’s do everything they can to make their quarterly profit predictions a reality.  The right brain assesses whether or not this change is evidence of those efforts, as well as the character of management.

Lots and lots of information like this is floating around out there, but most people miss it.  If you found this exercise useful, all of the specifics of how to do it are contained within my book The Intuitive Investor: A Radical Guide for Manifesting Wealth.  Normally if I read a plug like that I would roll my eyes.  But in this instance, the reason I wrote the book is so that both of us can benefit from its purchase.  I benefit to a very small extent financially from your purchase, but you also benefit because you learn how important the right brain is to making money.  A balanced and excellent arrangement, don’t you think?

Jason