AMERICAN EXPRESS CO. $58 (New York symbol AXP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $69.6 billion; WSSF Rating: Average) is one of the world’s biggest financial services companies, with offices in over 130 countries. Warren Buffett’s Berkshire Hathaway owns about 13% of the company.

Best known for its American Express charge and credit cards, the company gets most of its revenue from fees it charges merchants when cardholders purchase goods and services. Its other major business is its 2,200 travel agencies and travelers checks.

Despite the wave of new customers in the past few years, most American Express cardholders tend to have above-average incomes and good credit histories. They also spend, on average, over $11,000 a year.

Although American Express’ bad loans have moved up in the past year, they’re still less than 3% of total card receivables, which is below the industry average of 4%. New laws that make it harder for individuals to file for bankruptcy have also helped it keep loan losses down.

Like most financial institutions, American Express sells loans to third parties to cut risk. Rising defaults in the subprime mortgage market could hurt future demand for asset-backed securities like these. However, proceeds from these loan sales typically account for 10% of American Express’ total revenue.

The company will probably limit its exposure to future bad loans by raising interest rates and fees on certain accounts. It will also boost rates on introductory offers aimed at getting customers to transfer balances from other credit cards.

Revenue rose from $23.8 billion in 2002 to $29.1 billion in 2004. In 2005, the company spun off its brokerage and wealth management operations as a separate company called Ameriprise Financial Inc. (see box). Consequently, revenue fell to $24.3 billion. However, strong growth in the number of cards outstanding and rising cardholder spending per card lifted revenue in 2006 to $27.1 billion.

Earnings excluding non-recurring items rose from $2.01 a share (total $2.7 billion) in 2002 to $2.74 a share ($3.5 billion) in 2004, but fell to $2.30 a share ($2.9 billion) in 2005. Income grew to $2.82 a share ($3.5 billion) in 2006.

American Express is adept at using joint ventures with merchants and special rewards programs to attract new cardholders and increase spending. For example, American Express is now the only credit card accepted by discount warehouse retailer Costco. That helps American Express sign up customers who otherwise would have used a regular bank-issued credit card.

The company is also enjoying the benefits of a 2004 court ruling that struck down rules that Visa and MasterCard used to prevent member banks from issuing American Express cards. The company has now formed alliances with Citigroup, Bank of America and other leading banks.

The long-term outlook for credit cards is bright. More people use them for everyday purchases, instead of paying with cash or checks. The rise of online shopping has also spurred card use.

For travelers, credit cards make it easier to pay for hotels, meals and other services in local currencies. That could cut demand for the company’s travelers checks. But new products such as pre-paid debit cards should help American Express offset any drop in travelers check sales.

Growing use of credit cards in developing countries should also spur long-term growth for American Express. It recently expanded its operations in China and Russia, mainly through partnerships with local banks, which cuts its risk. Rising prosperity should also spur demand for American Express’ travel services.

American Express owns some of the best-known brands in the financial services industry. It should earn $3.50 a share in 2007, and the stock trades at 16.6 times that figure. Earnings could grow to $3.90 a share in 2008, which implies a p/e of just 14.9. The $0.60 dividend yields 1.0%.

American Express is a buy.