AmEx Downgraded At Deutsche Bank: What You Should Know

American Express Company AXP reported positive 1Q16 results, with improvements in key metrics. Deutsche Bank’s David Ho downgraded the rating for the company from Buy to Hold, while maintaining the price target at $66. The analyst commented that rising expectations, following the EPS beat, limits upside to the stock, and recommended waiting for “a better entry point.”

The EPS estimate for 2016 has been raised from $5.65 to $5.75, after the company reported its Q1 results.

Rising Revenue Expectations

Revenue growth expectations are rising due to AmEx’s revenue growth beat and favorable credit outlooks offered by all the large card issuers that have reported results so far. Analyst David Ho said, however, that EPS upside is likely to be expense driven, rather than revenue driven. He added, “This was fine when AXP was trading at 10x, but not at 12x+.”

Ho further mentioned that investors may underestimate the drag on revenue from proprietary cashback. AmEx’s marketing costs in 1Q were nearly $100m below Deutsche Bank’s estimate, and management seemed to indicate a decline for 2016. AmEx may shift these dollars to proprietary cashback rewards, “which as a contra-revenue item to discount fees, would pressure revenue growth y/y,” the analyst elaborated.

Other Concern Areas

AmEx achieved a dramatic increase in new account acquisitions in Q1, but sustaining and monetizing this may be “more challenging,” Ho said.

“1Q16 credit trends remained benign, and AXP will still be a higher quality credit play within Financials. But the mix of recent loan and receivables growth may lower this perceived quality,” the Deutsche Bank report added.