Deutsche Bank Slashes AmEx Target By Nearly 30%, Maintains Buy

• American Express Company AXP shares have plummeted 24 percent since January 4, and are currently trading close to their 52-week low of $51.91.
• Deutsche Bank’s David Ho maintained a Buy rating for the company, while reducing the price target to from $90 to $66.
• The recent underperformance of American Express’ shares appears overdone and could be boosted by improved operating leverage, Ho stated.

American Express’ stock has been the worst performing Dow stock in 2016, down 25 percent versus a 2 percent decline in the Dow. Analyst David Ho believes that the year-to-date underperformance is overdone.

Ho pointed out that American Express is one of the least credit sensitive names within the Financials segment, besides being one of the highest yielding and a powerful global brand.

American Express is not “broken,” but needs to refocus on its strengths, the analyst commented, while adding, “The market seems to be pricing in lower profitability and earnings growth ahead, but the after the Costco USA exit, ROEs should improve and the earnings mix shifts more towards the faster growing network, acquiring, and payments businesses.”

American Express’ underlying EPS growth can still hit the 12-15 percent level. Ho said, “Without Costco, AXP’s EPS clearly looks worse (we est. $4.30 in 2015), but non-Costco EPS growth could be 9% in 2016 and 19% in 2017.”

The stock may appreciate if the company exhibits improved operating leverage. Moreover, Ho believes that management’s 2017 EPS target of $5.60 can be achieved with only 1 percent reported revenue growth, ex-Costco, from 2015 through 2017, and a 1 percent decline in expenses.

The Starwood cobrand deal needs to be retained. “While the potential loss of Starwood is manageable (we est. up to ~$0.35 of EPS), losing it would likely cast serious doubt on the core business model,” the Deutsche Bank noted.