- American Express stock is down 35% over the last year and fell 12% on earnings last week.
- The company's niche as a high-end travel and entertainment card has eroded.
- Without a sense of urgency, 2016 will be a long year for the company.
The loss of Costco (NASDAQ:COST) as a customer, announced almost a year ago, precipitated the last year’s disastrous fall in the shares of American Express (NYSE:AXP), down almost 35% over the last year, but the problems for American Express go much deeper.
American Express has lost its niche and lost its way.
For decades, most people knew what American Express was all about. American Express was a service for travelers, especially those going out of the U.S. Whether it was offices in European capitals giving local Americans their mail, travelers’ checks that made safe money portable on long trips, plastic cards that assured businessmen of a good exchange rate, or organizing business’ travel and entertainment expenses, American Express was about foreign exchange, business travel, and a luxury cache.
The trouble is that Mastercard (NYSE:MA) and Visa (NYSE:V) have gradually taken away those niches from American Express. Many member banks now know how to serve corporate clients’ business travelers. There’s no difference in the exchange rate between various types of plastic. People connect with the home base via Skype and e-mail, and no one uses checks of any kind.
This rot had been growing for decades before Costco decided to switch its customers to Citigroup (NYSE:C) Visa cards, a process that is still in process. Costco said that American Express services cost too much, that it could get a better deal with its new partners, and pricing has been a problem for some time. American Express has long charged small merchants discounts as high as 5% to process their transactions, double the standard Visa rate, and many banks charge even less to good credits.
Clever marketing covered up the problems for many years. Having famous comedians use the cards for ordinary purchases made for more direct competition with the big processing networks, but high costs – American Express was late to credit, late to cut fees – gradually eroded the brand loyalty.
You could see it in American Express's fourth quarter earnings. Revenues down 8% year-to-year, to $8.4 billion from almost $9.1 billion. Net income down 38%, to $900 million or 89 cents per share from $1.45 billion, $1.39 per share a year ago. This accelerated a trend that saw revenue for the year down 4% and net income down 12%. American Express stock has fallen 12% in value since the announcement and closed January 27 trade at $54.52.
Was there any good news for American Express? Yes, on a constant currency basis revenue was actually up 4%. The card business, again on a constant currency basis, was actually up 3%, cards in force were up 5%, and the company said it would cut $1 billion in costs over the next year.
But ValueAct, a major hedge fund, has sold out its $1 billion stake in the company, and the company is dumping its “enterprise growth” unit, based on the $300 million acquisition of Revolution Money in 2010. American Express's efforts to serve low-income consumers, like the prepaid Bluebird card offered by Walmart (NYSE:WMT), look like a dry hole. To add insult to injury, one of its hottest marketing executives, Leslie Berland, has gone off to Twitter (NYSE:TWTR).
One thing that has kept American Express stock high until now is the fact that BRK.A (NYSE:BRK.A) owns 15% of the common and Berkshire still has a huge retained gain on its holding, but the shine is even off Warren Buffett these days.
CEO Ken Chennault told a conference this week that American Express doesn’t even “need plastic,” that it can load balances on smartphones and have people spending “right away.” But this is not a differentiator. Most of what had been American Express’ “moat,” the things that made it different, are gone, and the barbarians are at the gate.
It’s going to be a long year.