- Loss of business from Costco has been a drag on the American Express stock.
- American Express has branding initiative underway, but the results are yet to be seen.
- Many fixes may be needed before American Express profits grow again.
After holding steadily at the $80 level, the share price of American Express (NYSE:AXP) responded negatively to fourth quarter earnings that confirmed investors’ deepest worries. The huge loss of business from Costco (NASDAQ:COST) is hurting American Express. Now that the American Express stock is at levels not seen since early 2013, it is worthwhile for investors in search of value to dig into the details.
Costco Channel Loss Is Hurting American Express
American Express and Costco ended their partnership after the former wanted to cut the fees paid to the payment network. In the latest quarter, Costco’s contribution to American Express revenue fell sharply lower. Quoting Jeff Campbell, Executive Vice President and CFO at American Express:
“…billings growth remained consistent sequentially 5% despite further softening in billings on the Costco co-brand product, where volumes this quarter dropped more significantly versus the prior year.”
American Express still has some residual benefits with a contract extension with Costco. American Express' management still lowered its forecast for this year. It now expects its Earnings Per Share or EPS during 2016 to be between $5.40 and $5.70.
American Express earned $0.89 per share in the fourth quarter and $5.38 per share for the full year. The stock has a P/E of about 10 times earnings.
By mid-year, when the volumes from Costco fall, American Express will still have related costs to bear, until the first quarter of 2017.
The advent of mobile billing and processing looks like it is a threat for credit card firms. On closer inspection, Apple Pay receives strong interest (as measured by the count of mentions on the web). While there's still probably a long way to go for Apple Pay, the mode of payment essentially makes no difference to Costco in the ultimate analysis.
Warren Buffett Owns 15% Of American Express
Legendary value investor Warren Buffett still owns 15% of American Express. For now, Buffett has not made any statements or take any activist stance that would result in any management change or change in strategy.
Trouble ahead For American Express?
American Express clearly faces troubling competition from other banks that rely on credit card usage for revenue. Pressure on transaction fees has resulted in American Express expecting merchant fees to fall over time. The company’s strategy is two-fold. One being co-branding with companies like Delta, Starwood, Cathay Pacific, British Air and Charles Schwab. The second being, the OptBlue program, which aligns American Express’ fee rates with that of the card networks. It remains to be seen how this impacts American Express.
Wait On The Sidelines For Now
Markets do not believe American Express will find success in making up for the business it lost from Costco. It's very likely that higher pressure from competition, the cost of brand building, and a potentially weak economy this year will hurt American Express. Investors should wait for the stock to settle. This may take months. If the new initiatives prove to be performing well, it could present investors with a buying opportunity in the American Express stock later in the year.