Morgan Stanley Downgrades American Express, Investors Less Likely To Pay Up For Cost Rationalization Than Revenue Growth

• American Express Company AXP shares have declined 34.57 percent over the past one year, down to $55.06 on January 22.
• Morgan Stanley’s Cheryl M. Pate has downgraded the rating on the company from Overweight to Equal-weight, while lowering the price target to $64.
• With expectations of a slower top line and increased investment spend likely to push double digit EPS growth out to at least 2018, Pate prefers to move to the sidelines.

Analyst Cheryl Pate explained, “We move to the sidelines on AXP on a longer trajectory and a higher degree of uncertainty around future growth.”

Pate now expects top line growth above the mid-single digits to be difficult for the company to achieve in the medium term, against the evolving payments landscape.

With steeper discount rate declines expected, it will become even more critical for American Express’ billed business to gain market share, according to the Morgan Stanley report.

Pate believes that “sustainable high-single-digit revenue growth, likely a function of higher domestic acceptance and stronger international penetration, will be the key to valuation moving back toward a market multiple over the longer term.”

Expense management is also expected to play a more important role in EPS growth going forward, with the company having announced a $1 billion cost reduction initiative. Pate believes that “investors as less likely to pay up for cost rationalization than revenue growth.”