Earnings Preview: Why We Think American Express Will Be Alright, Just Not In The Near Term

-22.80%
Downside
227
Market
175
Trefis
AXP: American Express Company logo
AXP
American Express Company

The American Express (NYSE: AXP) stock has been under pressure in 2016, its shares having lost nearly a fifth of their value since the beginning of the year. The main reason for this performance is the loss of multiple important partnerships in the previous year. Chief among this was the loss of American Express’ relationship with Costco, which contributed close to 8% of total card spending for AmEx in 2015. In addition to this, the company has lost co-branding deals with Jet Airways and Fidelity. It could lose this status with the Starwood Hotel chain as well, which is in the process of being acquired by Marriott. This chain has a co-branding deal with the Chase company. Besides, these deals, there is also the tough competitive environment in which luring new customers to a brand requires ever more generous incentives and lower and lower Annualized Percentage Rates(APR) on credit card loans. All these factors cut into a company’s profits, making its shares less attractive.

axp preearnings

Given all this, Trefis is still optimistic about American Express, projecting higher revenue for the fiscal year 2016 than the consensus estimate, although our EPS expectations are lower. The main reasons for this are as follows:

  1. American Express has signed a deal with Sam’s Club to start accepting its credit cards. Sam’s Club is a membership only retail warehouse club, whose customers are more affluent and higher spenders. This fits well the company’s brand image, as American Express card holders spend an average of 71% and 60% higher than Visa and Master Card card holders, respectively.
  2. American Express is trying to bring more merchants on its networks, in a bid to be as universally accepted as Visa and Master Card by the year 2019. This has raised the company’s expenditures on marketing and promotions. In the first quarter, these expenditures rose by 19% year-on-year.
  3. American Express plans to cut expenses by $1 billion to weather the loss of revenue from the Costco partnership, in an effort to maintain margins.
  4. Early efforts at increasing card membership have been encouraging, with the number of cards in circulation increasing by 3 million in the first quarter.  Revenue is up 4% and loan portfolio is up 11%.
  5. However, increased acceptance will come at the cost of lower payment processing rates at merchants, which will affect the company’s bottom line.
  6. Finally, as we pointed out in a previous article, more than half of the company’s EPS growth in recent times has been contributed by share buybacks. This is difficult to sustain and increasing near-term expenditures will put pressure on the company’s reported EPS over the same term.
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Have more questions about American Express? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for American Express
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