- Ever since losing Costco the American Express stock hasn't been the same.
- The profits in processing are with the mainstream, and AmEx is outside it.
- Waiting for new blood to deliver on new ideas.
Sometimes you should just make the deal, at any price.
That is doubtless what American Express executives are thinking. Since Costco (NASDAQ:COST) announced in February it would ditch American Express for Citigroup (NYSE:C) as its main credit card, American Express (NYSE:AXP) stock has been getting killed, the shares falling 18%.
Half that fall came the day after the deal was lost. The rest has been a slow grind downward. At $70/share, the shares carry an earnings multiple of 12.7 while rivals like Visa (NYSE:V) trade at 31.
One might be tempted to pick up a bargain, but beware. What 2015 proves in the payment industry is that it doesn’t make sense to buck the mainstream. While there has been enormous publicity about mobile payments upsetting the payment cart – with Square (NYSE:SQ) and Apple (NASDAQ:AAPL) Pay drawing most of the headlines – the fact is that none of these innovative plays yet upset the mainstream of payments, which continues to migrate toward cards branded by Visa and Mastercard (NYSE:MA), offered under the name of banks.
Moreover, there are two sides to every transaction, a buyer and a seller. The companies representing sellers, merchants, have been doing especially well this year. Third party payment companies like Heartland Payment (NYSE:HPY) and Vantiv (NYSE:VNTV) have done especially well in the current environment. American Express has always charged merchants more than other cards, but it was hit hard by a court decision early this year against “steering," the policy of getting merchants to encourage the acceptance of one card over another.
AmEx’ high costs and the prohibition against steering, along with the Costco decision, have caused American Express stock to even trail Discover Financial (NYSE:DFS) this year. Discover has lost 15% of its value, but American Express stock has lost 24% since January.
The result has been stagnation and lower profits. American Express earned $1.27 billion during its most recent quarter, on revenues of $8.6 billion. Sounds great, but a year earlier profits were $1.47 billion on revenues of $8.7 billion. Not only are revenues going in reverse, but margins are going down as well.
One reason is that, to replace the high-income Costco shoppers, American Express has been forced to cater to lower-income Walmart (NYSE:WMT) shoppers with Bluebird. This is a good deal for low-income consumers, offering many banking services at far less money than banks charge. But margins are thin, and American Express has not advertised it heavily.
All this has left CEO Kenneth Chenault east of the rock and west of the hard place. Chenault is 64, and the growth problems will be solved, if they are solved at all, by people like Neal Sample, 40, a former executive with eBay (NASDAQ:EBAY) (before it spun out Paypal Holdings (NASDAQ:PYPL)) and Yahoo (NASDAQ:YHOO). He insists American Express can become its own “disrupter" but so far he has delivered nothing more than a new salt-and-pepper beard.
American Express’ dividend of 29 cents is safe, for now – the company regularly earns more than four times that. But a year ago it was earning five times the dividend, and even that dividend represents a yield of just 1.55% at the stock’s current price.
Until Sample announces meaningful change – the kind that can get his company over its Costco-induced hangover – I’d avoid the American Express stock.